The Best of Both Worlds – Active and Passive Investing
Recently we have been interested and began utilizing a combination of active and passive strategies in one format. The industry has decided to call these “Smart Beta ETFs”. They take the positives from active and passive strategies and meld them into one. So instead of using only market capitalization (size) of the company to build the index, other factors are used that are intended to select better companies. Some of the factors we have seen are:
• Low Volatility – Only selecting securities with lower volatility
• Momentum – Only selecting securities that are moving upward in price in the short term
• Value – Only selecting securities with fundamentally low valuations
• Growth – Only selecting securities with high earnings growth
These factors are used to replicate active strategies, while using the passive ETF chassis. That ETF chassis is important because it may help keep tax costs from eating away at returns. That is important to these Smart Beta ETFs since the changes to the internal securities is typically much higher than traditional indexes.
We expect this space to increase over the coming years and the factors to become more sophisticated. As we identify strategies that make sense for our clients and the proper due diligence has been done we will deploy them into portfolios.
You can read more about these types of strategies here: