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.”