Indeed, roughly two-thirds of active managers underperform their indexes every year, as Malkiel and other pioneers of indexing argued early on. Worse yet, a successful manager’s capacity to sustain a streak of outperformance is lower than those odds, suggesting that success in active management conforms to some of the simple mathematics of chance.
The SPIVA data series—the twice-yearly Standard & Poor’s Index Versus Active report—tells that tale reliably, and we recount it here at ETF.com each time it’s published.
Beta, The New Alpha
To be sure, the world of index investing Malkiel helped create is shifting. While more than 99 percent of all ETF assets are invested in index funds, ETFs are increasingly being used for alpha generation, or the indexed version of alpha.
“Enhanced beta” funds that systematically tilt portfolios for greater exposure to various factors that affect returns, such size, value, momentum or quality have become all the rage in the contemporary ETF market. Interpreting what constitutes a “smart beta” ETF as liberally as possible means such ETFs now make up $380 billion, or a fifth, of total U.S.-listed ETF assets.
And even though these strategies are bona-fide rules-based indexes, they are poaching market share from the true active managers plying their trades. Worse yet for active managers, pure-beta, capitalization-weighted index ETFs are increasingly being arranged in alpha-seeking constellations.
Even Vanguard, the pioneer of such pure-beta index funds, talked about creating alpha-seeking investment strategies using its ETFs in a webinar on ETF.com. Of course, Vanguard is hardly alone in using index ETFs to deliver outperformance.
More than $100 billion of ETF assets are now managed by so-called ETF strategists. That’s 5 percent of the ETF market.
The new edition is likely to appear by the end of the year, and, again, will contain, among other ETF features, a section with addresses and contact information for ETF sponsors.