Vanguard: Mind fund details, not labels

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  • 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.