They both promise to outperform the market, but the strategies are more like cousins than siblings
Smart-beta ETFs have been getting increased attention, particularly among those who see it as the happy medium between active management outperformance and the low costs of indexing. For some, that begs the question: are smart-beta ETFs simply active management products with lower costs?
Industry experts and insiders speaking to ETF.com had different takes on the question. For Elisabeth Kashner, CFA and director of ETF research at FactSet, the propriety nature of quantitative active managers makes it difficult to answer the question. “Active managers have every reason to keep their models a secret … [but] it does seem extremely likely that the same methods are used.”
Todd Rosenbluth, director of ETF research for CFRA, said that unlike quantitative active management, smart-beta ETFs are transparent with their rule book, are more tax efficient, and have lower costs than mutual funds. Most smart-beta strategies, he added, are built on well-established quantitative research or recently developed academic findings.
But Bloomberg Senior ETF Analyst Eric Balchunas would rather lump smart-beta strategies in with active ones. In spite of the indexing and scheduled rebalancing that characterize both passive and smart-beta strategies, the pursuit of returns that deviate from a market-cap-weighted index still makes smart beta part of the active family.
“[P]eople are using the word ‘smart’ to make it seem like it’s going to outperform, and that may or may not be true,” Balchunas emphasized. “I think a great way to look at smart beta is it’s active [management] in smarter packaging.”
Janet Johnston, portfolio manager at US-based TrimTabs Asset Management, agreed that smart beta isn’t smart. But speaking as a veteran stock-picker with 25 years of experience, she saw a big difference from what her traditional approach offers.
“We listen to conference calls, we dig into our companies, we make active decisions about what stocks go in and out of the portfolio, and when,” Johnston told ETF.com. “That’s very different from portfolios driven purely by a quantitative model. Just because a quantitative fund has more activity, more factors or more rules to appear active, doesn’t make it an actively managed product.”
Kashner saw truth in the statement. The top-down approach used by traditional active portfolio managers to make macroeconomic calls is not much different from what ETF strategists do now, she said. Many of the elements involved in bottom-up research are also captured in smart-beta strategies.
“Certainly when you go to the value factor, some people talk about quality, boiling that down to earnings stability or debt ratios,” she said. “That’s all part of the classic bottom-up, kick-the-tires research.”