“In choosing to hold only a market segment rather than the whole, strategic-beta funds make active decisions,” Rekenthaler said. “And active decisions, by definition, lead to higher expenses and more potential headaches.”
However, while the smart beta may be active in nature, the strategy is implemented through a passive index-based ETF, which helps cut down costs. There are 574 enhanced index-based U.S.-listed ETFs with an average 0.58% expense ratio, according to XTF data.
Related: Smart-Beta ETFs that Capitalize on the Knowledge Effect
“Silence the noise, and you’ll see that most winning active managers succeed for only a few reasons – factors, if you will,” Rekenthaler said. “So why not buy those factors and skip the rest?”
An active portfolio manager may conduct research and analysis on a group of securities and screen for specific qualities. Investors have traditionally paid a premium for the added effort. However, this active style can be easily replicated through a cheaper mechanical model or a passive smart-beta ETF competitor.
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