From Barron's Focus on Funds:
Fund Managers’ Next Big Headache is Called ‘Smart Beta’
The rise of “smart beta” could be something of a menace for stock-picking fund managers.
Take Schwab Fundamental U.S. Broad Market Index ETF (FNDB). The $80 million fund, launched last August, is built around factors like retained operating cash flow and a good mix of dividend and buybacks. That makes it something like a stockpicker’s more mechanical cousin. Accordingly, its role in your portfolio would be much the same as you’d want from an active manager. It costs a fraction of a pricey stockpicker, at 0.32%.
All this must in some ways feel like HAL 9000 reading the astronaut Bowman’s lips before locking him out of the ship.
But there’s more. Goldman Sachs has its eye on the question: What happens if, as appears likely, a huge number of individual investors sign on to “smart beta”? The answer might be headaches even for those managers whose jobs aren’t threatened by the trend.
Goldman’s Robert D. Boroujerdi and four colleagues envision money flooding in and out of illiquid stocks at the whim of rules-based ETFs, whose presence might serve to drive up the correlation of stocks and/or drive up stock prices. All that might still work in a smart and capable active manager’s favor, of course. But first, he or she would need to understand it, and realize what’s going on at a very granular level, down to individual stocks.
Goldman’s notable example comes via the $13 billion SPDR S&P Dividend ETF (SDY). This popular ETF owns S&P 1500 companies which have increased dividends for 20 or greater consecutive years. Note that this strategies uses the S&P 1500, which includes small- and midcap stocks, not the 500....MORE
