Industry veteran says vehicle’s appeal will only grow given disillusionment over active fees
Smart beta is an ETF “sweet spot”, said an industry veteran, and its appeal will only increase given the cynicism over active management.
According to Tom Goodwin, senior research director at FTSE Russell, this multi-factor approach and quasi-active exposure is becoming more attractive for investors.
However, he said that many advisors are still working out where smart beta fits into clients’ portfolios.
He said: “A lot of advisors are very interested – some have their clients into it but there is still a learning curve. A lot of advisors are struggling with how to fit multi-factor ETFs into their clients’ portfolios. Does that replace something? What does it replace? Do you use it as a core and have satellites around it? Or do you have it as a satellite around some core?”
Goodwin described the smart beta ETF approach as a logical next step because it’s so easy for advisors to utilise the investment vehicle’s flexibility.
He said: “It’s a natural evolution in the sense that there has been growing disillusionment with active management in terms of performance net of fees. At the same time we have had a rise of passive and have a lot of very low-cost passive vehicles that have gained in popularity.
“Smart beta blurs the lines between active and passive so it’s getting advisors who are a little disillusioned with active; maybe they don’t want as much active. On the other hand, those who were completely passive are like, jeez, I want something that doesn’t move up and down so much.”
Goodwin described how FTSE Russell had created a bottom-up sequential tilting, or “tilt-tilt” method, where the index is constructed as a multiplicative tilt of one factor or another which demonstrates strong exposures with high diversification.
He believes this compares favourably to the top-down multi-factor index approach, providing stronger factor capture, as well as better performance than the more standard cap weighted index.
This factor-based approach not only provides more options in terms of exposure and returns via ETFs but also does so at a more affordable cost than the traditional actively managed mutual fund. This, said Goodwin, gets to the heart of fees and the desire for transparency.
He said: “The big problem with active management, especially in the US, is there are simply too many poles in the water. And so what’s going to happen is a willowing out and as more poles come out of the water, the fishing is going to be better. Active management isn’t going to die but it is going to get smaller.”
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