Advantages Of Active Factor Investing

December 13, 2017

John AmeriksThere’s so much noise out there in factor-land: promises of spectacular return, philosophical arguments about the nature of markets, competing Nobel Prize awards … it’s hard to keep track.

At Inside ETFs 2018, one of the marquee panels is “Beyond the Hype: Strategically Implementing Factor ETFs.” We’re gathering five of the world’s leading experts to discuss the truth about factors and factor strategies. One of the people joining that panel is John Ameriks, global head of Vanguard’s Quantitative Equity Group. Vanguard recently filed to launch a suite of actively managed factor ETFs.

Inside ETFs CEO Matt Hougan recently chatted with Ameriks to learn Vanguard’s plans and what he intends to talk about at the conference.

Matt Hougan: There’s a lot of noise about factor investing in the market. What do investors need to know about factor investing they don’t know already?

John Ameriks: One of the things that’s really important is you should approach thinking about factor-based investing the same way you do investing in other active strategies. Factor investing simply brings a quantitative discipline to the choices active managers make about investing.

Hougan: Active strategies?

Ameriks: Yes, factors are active strategies. The truth is, chartered financial analysts, academics and researchers have been thinking about investing through a factor lens for some time; we’re just now getting into an era where practical tools to implement those strategies are available to investors. My goal at the upcoming Inside ETFs conference is to try to get people to understand why that matters, and what it means about how they approach evaluating factor strategies.

Hougan: Let’s take a step back first: What problem do factor ETFs actually solve for investors?

Ameriks: The one that gets the most attention—and possibly too much attention—is, historically, certain factors have been associated with excess returns.

Over time, at least some subset of factors has delivered higher-than-market returns, with total levels of risk similar to the market as a whole (although the nature of that risk is different). Moreover, there are well-developed reasons and out-of-sample data suggesting there’s a high likelihood this may persist over time.

Factor-based investing gets at the systematic sources of return that successful active managers have been able to capture. Factor-based strategies do so in a package that’s more transparent, better-constructed and potentially lower cost.

Hougan: You sound skeptical about the true sustainability of those excess returns.

Ameriks: Only because it’s easy for people to get swept up in the excitement of the idea without understanding the nature of the risks they’re taking on. We want people to fully understand they’re making active bets when they buy factor ETFs, and active bets come with the potential to both out- and underperform.

Hougan: What other problems do factor ETFs solve?

Ameriks: They help diversify the risks in a portfolio. If you have a portfolio you’re passionate about, factor analysis can show you if you’re over- or underweight certain factors, and factor ETFs can help you balance out those risks.


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