ETF Trends
ETF Trends

Vanguard is taking a closer look at so-called smart-beta index exchange traded funds as a way to combine active strategies in a cheap investment wrapper.

“It’s just another way of doing active management. It’s maybe a lower cost way of doing active management and that’s what gets our interest,” William McNabb, chairman and CEO of Vanguard told CNBC.

Smart-beta, enhanced, factor-based, intelligent or fundamental index ETFs track a customized portfolio of securities that eschew traditional market capitalization weight methodologies. Instead, these smart-beta ETFs track companies based on factors like earnings, dividends and cash flow. [Getting a Handle on Smart-Beta ETFs]

The smart-beta ETF route would provide Vanguard with a middle ground between passive and active strategies. Essentially, the enhanced, smart-beta ETFs provide active strategies through a passive indexing methodology. [WisdomTree: What Is Smart Beta Anyway?]

“We think active and passive can work together, but the key point is we believe in low-cost active,” McNabb said. “If you have a high-cost active fund, it’s a loser’s game.”

Vanguard has focused on the passive indexing route because of greater difficulty for active management to squeeze out value. According to the Standard & Poor’s Indices Versus Active Fund Scorecard, or SPIVA, about 60% to 69% of active U.S. stock funds underperformed their benchmarks over the past 12 months through mid-2013.

“Our view is own the market. And over a long period of time, if you own the market at very low cost you’ll actually outperform,” McNabb said.

For more information on ETF indices, visit our indexing category.

Max Chen contributed to this article.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.