Dickson unequivocally stated Vanguard’s take on smart beta. “We don’t do smart beta,” he said.
In short, Vanguard believes market cap-weighting is the result of buyers and sellers coming together to set the best price for a security. “Active managers say that’s wrong, and that’s how they earn their living,” Dickson said. That's fine, he noted, but he disagrees with marketing that promotes smart beta as a better approach to indexing.
“In some ways it [smart beta] is an evolution over the past three decades . . . of building factor portfolios as a way to deliver different sources of return and risk exposures,” Dickson said. “This innovation is more about rules-based, lower-cost and more targeted exposures, and it’s really more of a threat to high-cost, traditional active managers. From that lens, I figured out what the ‘smart’ in smart beta actually means -- ‘Silly Moniker for Active Rules-Based Trading.’”
Other panelists discussed the huge growth opportunity for ETFs in fixed income. Nick Good, chief operating officer at State Street Global Advisors, said 2014 was a tremendous year for fixed-income ETFs in terms of inflows.
“From my perspective, the most profound impacts have been in non-traditional fixed income -- high-yields, convertibles, senior loans and that kind of thing,” he said, adding that ETFs have opened up a new market for retail investors thanks to their low costs and greater liquidity.
“Most individuals don’t want to pour over individual bonds,” Good said. “They want to make decisions about diversified baskets of bonds. That said, there are still a ton of misconceptions about bond ETFs, and I spend a lot of time with investors talking about fixed income and how they trade and are priced and how they do during times of stress."
Good said two trends should boost the market for fixed-income ETFs: A greater acceptance of non-traditional fixed-income strategies; and the growing number of active fixed-income managers coming into the ETF space, such as DoubleLine.
“There’s still a huge amount of runway, and they [fixed-income ETFs] represent less than 1 percent of the total global fixed-income market,” he continued.
An intriguing coda to the panel discussion dealt with the role robo-advisors, or automated investment programs, will play in the expanded use of ETFs. In short, they’re expected to accelerate ETF adoption because their investment platforms are built around cost-efficient, ETF-based portfolios.