New Bernstein ETFs: Can’t Beat ’Em, Join ’Em

The firm that created a stir last year by calling passive investing worse than Marxism is putting its money where its mouth is with the recent launch of two active ETFs. Launched on Oct. 16 of this year, the two new funds are:

• Bernstein U.S. Research (BERN): BERN aims to provide enhanced exposure to large-cap U.S. securities by selecting those stocks rated “Outperform” by Sanford C. Bernstein & Co. and ranked within one of the top three quintiles of their quantitative alpha model. The annual expense ratio is 0.50%.
• Bernstein Global Research Fund (BRGL): BRGL holds large-cap global stocks rated “Outperform” by the analysts of Sanford C. Bernstein & Co. and ranked within one of the top three quintiles of Bernstein’s quantitative alpha model. The annual expense ratio is 0.65%.

Bernstein states it is “one of Wall Street's premier investment research firms.” CEO Robert van Brugge said his firm will “hold ourselves accountable and demonstrate to our clients and the market that deep fundamental and quantitative research insights deliver value beyond passive options."

My Thoughts

Last year, I was quite critical of the firm claiming that passive investing was worse than Marxism, and pointed out it seemed like they were asking for a handicap to level the playing field for what my calculations showed as poor results and asset outflows. I called Bernstein’s position worse than Marxism.

But I applaud Bernstein for these launches. Over time, it would seem that these ETFs will measure the results of its claim. An email and follow-up call to an AllianceBernstein media relations representative asking if these two ETFs would be a good measure of the firm’s total stock-picking success went unreturned. AllianceBernstein reports it has $135 billion of active equity under management as of the end of October.

While it would take at least a quarter century to see if these ETFs have any statistical ability to best the market enough to cover their fees—0.50% for BERN and 0.65% for BRGL—we may not have to wait that long. Though AllianceBernstein called my estimate last year of active equity returns from their annual reports “deeply flawed,” they declined to say why.

Another approach, however, might be to see how their equity mutual funds have performed. According to Morningstar, their $32.2 billion in stock mutual funds performed slightly above average, with 3.1 stars.

By comparison, more passive and so-called Marxist firms like Vanguard and Dimensional Fund Advisors averaged 3.8 and 3.7, respectively. One would presume that AllianceBernstein would apply the same philosophy of “deep fundamental and quantitative research insights deliver value beyond passive options” for their mutual funds.

While I won’t be buying either of these two new ETFs, there are plenty of worse ETFs on the market, including some index ETFs such as levered inverse ETFs.

Not only do I applaud Bernstein for these new launches, I hope they are successful. Because if everyone indexed, financial markets might actually stop functioning, which could be worse than Marxism.

At the time of writing, the author held none of the securities mentioned. Allan Roth is the founder of Wealth Logic LLC, an hourly based financial planning firm. He is required by law to note that his columns are not meant as specific investment advice. Roth also writes for the Wall Street Journal, AARP and Financial Planning magazine. You can reach him at [email protected] or follow him on Twitter at Allan Roth (@Dull_Investing) · Twitter