- Is the portfolio construction process rules-based? Any active fund, or any index with an activist selection committee like Cohen & Steers', which trolls the REIT market for "experienced management teams and high quality properties," is not rules-based. It's therefore "active."
- Does the portfolio reflect the complete, unaltered market segment? If yes, the fund is "vanilla."
- Does the index apply economic concepts at the constituent level to select and/or weight its portfolio securities? If yes, the fund is "strategic;" if no, it's "idiosyncratic."
More formally, here are my definitions of the four strategy types, plus a few key statistics:
- Active: portfolios crafted by humans. This includes funds designated as active by the Securities and Exchange Commission.
- Total AUM as of May 15, 2014: $14.9 billion
- Fund count as of May 15, 2014: 71 (excluding asset allocation and alternatives)
- Example fund: Pimco Total Return ETF (BOND | B)
- Vanilla: funds/indexes that represent the entire investable opportunity set in a market segment. A vanilla index reflects as broad a pool as possible for a given market segment, weighted at its consensus market valuation.
- Total AUM as of May 15, 2014: $1.275 trillion
- Fund count as of May 15, 2014: 805
- Example fund: iShares MSCI EAFE ETF (EFA | A-91)
- Strategic: funds/indexes that apply research-based, economic concepts for security analysis to select and/or weight positions from an investable, representative, vanilla security universe. These economically based indexes can use bottom-up techniques, technical factors such as momentum, and macroeconomic analysis to select and weight their constituents.
- Total AUM: $353.4 billion
- Fund count as of May 15, 2014: 456
- Example fund: Vanguard Dividend Appreciation (VIG | A-61)
- Idiosyncratic: Rules-based portfolios applying selection and/or weighting rules that are unrelated to the economic characteristics of its component securities.
- Total AUM: $90.2 billion
- Fund count as of May 15, 2014: 129
- Example fund: PowerShares QQQ ETF (QQQ | A-49)
- Not included: asset allocation and alternatives, plus 27 funds with activist index committees. My bad. I couldn't face parsing the strategies for these complex, largely unloved funds.
- Total AUM: $13.3 billion
- Fund count as of May 15, 2014: 121
- Example fund: Guggenheim Multi-Asset Income ETF (CVY)
That was easy. Well, OK, it wasn't that easy.
But it is pretty easy to pick out the active funds and the vanilla indexes.
The Securities and Exchange Commission (SEC) has taken care of the Active ones.
For finding the vanilla funds, I built myself a series of flow charts for using ETF.com's ETF Classification System's selection and weighting fields to identify vanilla funds in each asset class. Email me at [email protected] if you want a copy.
The hard part is making sense of the nonvanilla 49 percent of the U.S. ETF landscape. As we saw in blog 3 of this series, it's a full-time job for ETF curators to understand, describe and sort these funds.
A little evolutionary explanation will go a long way in helping us sort through the chaos of the 49 percent.