According to Funds Europe, Vanguard, the investment management firm, publicly categorised smart beta as active management in a newly published paper on the method of investing.
Despite being one of the largest providers of passive investment strategies, Vanguard recognises that significant lossesincurred by large cap and growth stocks during the 2000 to 2002 bear market led investors to seek a move away from standard market capitalisation weighted indices. Vanguard has as a matter of fact a large suite of actively managed products itself.
With all alternative investment options on the table, smart beta stands out. Its funds are essentially index funds with a twist in that, rather than relying on traditional market capitalization based indices, they use alternative weighting schemes based on measures such as volatility or dividends, amongst others.
Despite Vanguard’s Jack Bogle saying that “smart beta is stupid”, Vanguard is now sending a strong sign in support of alternative indexing. The firm believes that “by definition, smart beta indices should be considered rules-based active strategies because their methodologies tend to generate meaningful security-level deviations or tracking errors, versus a broad market-cap index”.
There is little consensus on what this practice really is and even though some defend it, it merely fills the gap between active and passive management. Vanguard’s position is likely to raise issues given that many exchange-traded fund providers using smart beta categorise their products as passive.
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