Ulam: I’ve been looking at low-volatility funds recently, and one issue that comes up is that people who are investing in broader indexes like to have a "low vol" version so that they can see where the risk premia and the risk are coming from.
Jacobs: Absolutely. What we’re seeing is people getting smart about indexing and not relying on just the S&P or the Nasdaq. They want to know the risk and return. They want to know the volatility. What we’re hearing is: “Please, don’t give me another broad-based index, I need indexes that show me more and that have ways to measure and isolate factors.”
Ulam: So these low-volatility funds and value funds help you with your larger index tracking funds?
Jacobs: Absolutely; they help you understand what you are seeing in the bigger broader index.
Ulam: You were talking about blended funds earlier. What blended funds were you referring to?
Jacobs: You are going to see more and more of these blended indexes where, rather than saying I am going to put 50 percent in equities and 50 percent in debt, if you just put 100 percent in a blended index of that portfolio, you would have had a far better return over time than if you had picked one or the other, or dumped 50 percent into a bond ETF and 50 percent into an equity ETF. Plus there are transaction costs to balancing. And now it is all about transaction costs.
Ulam: You’re saying a blended index really gives you a better return?
Jacobs: Yes: The risk-adjusted return, less transaction costs, over time. You are still going to be moving positions—buying and selling ETFs or whatever—to track those two indexes. And transaction costs and data costs are the enemy of the portfolio manager who has a pure benchmark.
It’s all about basis points. Going back to John Bogle: Basis points matter over time.