Smart-beta ETFs: bar has been raised for active managers

BlackRock Canada chief explains where advisors can now provide value

Smart-beta ETFs: bar has been raised for active managers

The head of iShares for BlackRock Canada said active managers will always have value - but warned them the bar is being raised year after year.

Pat Chiefalo believes the rise of smart-beta ETFs is a natural progression for the vehicle, allowing investment investors to take advantage of multi-factored exposures in a transparent, diverse way.

He said advisors can no longer rely on these features being the sole domain of active managers, who now have to provide value at the “higher end of the spectrum”.

“Things like active security selection that actually delivers value, factor timing, a lot of these things that were intermingled with alpha in the past, are beginning to be separated out,” he said.

“So what active managers are being asked to do now is at the higher end of the spectrum – i.e. factor timing, security selection, even market timing type of stuff; things that aren’t necessarily encapsulated today in single-factor or multi-factor ETFs.”

He added that this raising of standards when it comes to providing cost-effective solutions and value is true for everybody across the industry, not just active managers.

But Chiefalo said: “The expertise they are now being asked to deliver on is potentially a higher bar, where simply tilting towards value stocks is no longer something that would be considered only in the camp that an active portfolio manager can deliver.”

He added that the ETF progression to smart beta has been an easy progression because it’s simply a packaging of the factors active managers have always leveraged.

He said: “As opposed to seeking out an active portfolio manager to give you that factor tilt or that factor exposure, given where we’ve come from with technology with the ETF vehicle, we’re able to provide this type of multi-factored exposure in an ETF in a very rules-based transparent methodology that’s very easy for a portfolio manager to understand, and understand how it’s going to work.

“To me, it’s just a very easy, natural progression. Active managers in the past have always leveraged these factors in seeking to achieve differentiated exposure and alpha exposure, where they are tilted towards value stocks, minimum volatility stocks or momentum stocks.

“Now these are things we are able to package … that’s the natural evolution of the product.”


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