A lot is happening at Inside ETFs this week. A new administration taking office in Washington has many looking for guidance on where to invest, and in what. Monday’s many panels and discussions centered largely on what’s working and what’s not in investing.
Among the day’s highlights, Vanguard’s Tom Rampulla offered an in-depth glimpse into the state of active management, arguing that lack of performance and high costs have most active managers consistently underperforming benchmarks. Active management isn’t exactly dead, he says, but it’s evolving in order to survive.
That survival is expressing itself in the form of three key trends that can be easily seen in the ETF space; namely, lower-cost, actively managed passive portfolios and factor investing.
Smart-Beta Theme: Factor Investing
Factor investing specifically was the central theme of Monday’s great smart-beta debate led by Schwab’s Tony Davidow, J.P. Morgan’s Yasmin Dahya, Nasdaq’s Dave Gedeon, MSCI’s Raman Aylur Subramanian and Deutsche’s Arne Noack.
Growing in popularity and demand, factor investing via ETFs can be very effective as a way to capture excess return, but understanding how they work, how they correlate to one another, and they perform in different parts of the cycle are all crucial to getting it right.
The panel was clear: Timing factors is very difficult, if not impossible. But there are clues as to when factors are changing course. Underperformance is perhaps the easiest telltale sign that something could be changing in that factor cycle. Prices, valuations and P/E ratios all offer clues on inflexion points in these cycles.
But investors are better served by balanced exposure to several factors—often via a multifactor ETF—or by displaying long-term conviction in specific factors, and avoiding overexposure to too many factors that can offset each other in performance.
At the end of the day, as Davidow put it, factor and multifactor investing only works if it generates excess return or better risk-adjusted returns. Otherwise, it’s a lot of effort for no gain.
And is there one single factor for a Trump presidency? Subramanian offered one: value. But look for value within names that are likely to benefit from Trump’s growth plans.