Measuring How Active Your ETF Is

May 14, 2014

Forget about whether it tracks an index. Just look at the numbers using Active Share and the Fit score.

In the ETF world, the terms “active” and “passive” have been rendered almost meaningless by the proliferation of complex indexes.

True, the literal definitions remain intact: Passive ETFs track an index; active ETFs don’t.

But it’s hard to argue that this distinction matters much today, especially in the context of U.S. equities. That’s because index-tracking ETFs in the U.S. equity space deliver a mind-numbing variety of exposures—low volatility, share buybacks, relative strength, risk parity and quality, to name a few.

Confusing matters more is the existence of traditional plain-vanilla, cap-weighted indexes tracked by ETFs—vehicles that are passive in word and deed.

Still, even within the realm of nonvanilla index-based ETFs—whether you call them smart beta, factor-based or nontraditional—there’s a huge range of performance and exposure differences, some of which exceed the bets made by active ETFs.

Unfortunately, the label on the box often tells you little about how big a bet the ETF is making relative to the market. So it makes sense to look at numbers rather than words to tell how today’s wide-ranging index-tracking ETFs stand up next to both plain-vanilla ETFs and actively managed ETFs.

Measuring Up With ‘Active Share’

Two readily available tools can help. The first is Active Share. Active Share, described in a paper by Antii Petajisto, simply measures the holdings overlap between a fund and its benchmark. A high Active Share means that the fund and the benchmark diverge significantly with respect to the actual stocks in their baskets.

Active Share Example

While Active Share shouldn’t be the only tool for portfolio comparison (as the author makes plain), it provides insight into the range of variation among passive and active ETFs relative to a cap-weighted benchmark. It’s also useful when the performance history is limited—as is the case with some of the active ETFs shown below.

Following below is a table showing the Active Share for a variety of ETFs, culled from the relatively narrow confines of U.S. large-cap and U.S. total market spaces. I included popular smart-beta index-based ETFs, all of the active ETFs (there aren’t many)—highlighted in blue—and a pair of cap-weighted funds in bold for reference.


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