Actively Changing Landscape

October 20, 2017

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 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
    Total 3,321,583,835  

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.



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