Vanguard: Mind fund details, not labels | Entasis Asset Management

Summary

Frank Kinniry, a principal in the Vanguard Investment Strategy Group, discusses why it is important to understand the details of an investment rather than simply painting an entire category with the same brush.
The line between so-called active investments and so-called passive investments has blurred. Hundreds of ETFs and “smart beta” funds have come to market in recent years. While many ETFs are traditional market-capitalization weighted index funds, many (including so-called smart beta funds) are not.
The author believes much of the above may be occurring in order to “cloak higher-cost actively managed offerings under the secularly trendy banner of indexing.”
He believes low-cost actively-managed funds can outperform the average index fund. In turn, he believes that it can be better “by far” to invest in a low-cost active fund when compared to a high-cost index fund or ETF.
In summary, he states that it is overly simplistic to say that “indexing outperforms active management,” or that index funds are “low-cost” or “broadly diversified.”

Our Take

Investors (individual investors and financial representatives alike) need to do their homework. The search for a simple answer by applying generalities is commonly a fool’s errand.
We completely agree that many ETF’s and smart beta products are misunderstood, and in turn, typically masquerade as low-cost passive investments.
We also agree that a key criterion for all investments, active or passive, is the direct (expense ratio) and indirect cost (turnover/trading costs) of the strategy. The lower the cost of the strategy, the less ground the active manager has to “make up” relative to its target benchmark.
We utilize actively-managed and passively-managed investment products in client portfolios at Entasis. Read more about Our Process to understand our use of each.