What is active management? For many, it’s stock-picking. It’s no secret that the pioneer in retail passive indexing, Vanguard, has actively managed funds.
Yet, Vanguard founder John Bogle opposed his company’s foray into ETFs. ETFs promote trading (and commissions), which is generally unhealthy for a client’s portfolio. Better to buy and hold index funds.
For Canadian investors, of course, that’s not possible, since Vanguard is not permitted to sell its index funds in Canada. Investors have to make do with the next best thing: ETFs. And unless the investor is buying a total world market index, it’s by definition an active decision.
Does it matter? Consider: a U.S. broad-market ETF captures just about every relevant economic activity and is a fairly good proxy for global stocks. Not so with Canada, where the energy, finance and banking biases are well-known. A broad-market ETF in Canada is thus, by default, an active management bet – even though it’s based on passively investing.
Some Vanguard analysts reject “smart beta” – equal-weighting, fundamental indexing and low-volatility strategies – as a form of passive management. Says Rodney Comegys: “If you use a smart beta strategy, you’re effectively saying: I don’t believe the market is right and I’m going to take a different approach. Historically, people called that approach active management.”
But then, Vanguard is introducing its own low-volatility index fund in the U.S. As John Ameriks explains: “This new fund is actively managed and will employ a quantitative process to build a portfolio that seeks lower volatility over time than its benchmark. By contrast, actively managed funds traditionally seek to outperform a comparative market benchmark.”
So Vanguard analysts are never shy about acknowledging active bets. But is that active management?
Perhaps the Vanguard definition of passive investing is too constrained. “Smart beta” involves not so much stock-picking as stock-screening – a fairly mechanical process. In other words, active management may be in the eye of the beholder.