Traditional active managers may be outperforming their cap-weighted indices this year (although arguably it’s been largely driven by a crowded bet on technology, especially in large value; see Figure 4), but the investment landscape for active management has been fundamentally transformed with the advent of smart-beta ETFs as well as new, competitive entrants from alternative asset managers hoping to expand their retail presence.
As a result, investors are closely scrutinizing the sources of relative performance of the active managers and better determining whether value is being delivered beyond what can be explained by common risk factors.
Figure 4: % Overweight in Technology Sector One Determinant of Active Fund Outperformance
Low Vol Not Always Conducive With Active
Last January, we published an ETF.com piece titled, “Deconstructing Active Management,” where we profiled the active risk, or tracking error, of several U.S.-focused multifactor ETFs. We posited at the time that multifactor ETFs capture much of the active risk found in traditional active management programs that are balanced between value and growth.
In the article, we published a table displaying the active risk, or tracking error, of the multifactor ETFs as of 12/31/2016, which we redisplay here (Figure 5).
Figure 5: Active Risk Profiles of U.S.-Focused Multifactor ETFs (as of 12/31/2016)
|MultiFactor ETF||Ticker||Inception Date||Net Assets||Annual Report Net Expense Ratio (%)|
|Deutsche X-trackers Russell 1000 CmpsFtr||DEUS||24/11/2015||32,634,091||0.25|
|FlexShares Mstar US Mkt Factors Tilt ETF||TILT||16/09/2011||956,756,117||0.27|
|Global X Scientific Beta US ETF||SCIU||12/05/2015||73,008,088||0.20|
|Goldman Sachs ActiveBeta US LgCp Eq ETF||GSLC||17/09/2015||1,432,247,454||0.09|
|Hartford Multifactor US Equity ETF||ROUS||25/02/2015||27,237,185||0.29|
|iShares Edge MSCI Multifactor USA||LRGF||28/04/2015||314,709,474||0.20|
|JHancock Multifactor Large Cap ETF||JHML||29/09/2015||298,575,634||0.35|
|JPMorgan Diversified Return US Eq ETF||JPUS||29/09/2015||173,332,625||0.29|
|SPDR MSCI USA StrategicFactors ETF||QUS||15/04/2015||13,083,167||0.15|
Source: Bloomberg PORT. All risk characteristics shown against the iShares Russell 1000 ETF (IWB) as a proxy for the Russell 1000 Index. Factors displayed in blue represent exposures that exceed that of the "Size" coefficient.