The white paper lays out the premise and promise of EAM, and I will not attempt to summarize it here. The white paper was also supported by a massive dataset created to test the validity and viability of EAM (165 million data points), and reams of analysis was generated. However, the one pair of statistics from the white paper that truly captured my attention related to the statistical probability of outperforming the S&P 500 over rolling one-year periods:

• Over the past decade, the average large-blend active fund outperformed the S&P 500 over rolling one-year periods only 14 percent of the time. 


• Over the past decade, and based on 30,000 test EAM portfolios, the average EAM portfolio outperformed the S&P 500 over rolling one-year periods 72 percent of the time. The average annual excess return was an amazing 340 basis points. 


I found this pair of statistics stunning and intuitive. It certainly explains why active managers have seen a decade’s long rut of net outflows. It also suggested to me that perhaps now there is a class of investments that have the required horsepower to beat passive investing more often than it lost, and enough excess returns to justify the higher fees of active managers.

There is no doubt that such a statistical probability of outperformance would capture the attention of ETF investors—especially their financial advisors whose very business model is traditionally predicated on providing value to their clients in the form of excess returns versus the market. 
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Based on my due diligence into EAM portfolios over the past 10 months, I can also state that I believe EAM-powered ETFs will be able to manage the daily transparency of holdings currently required for ETFs (this is due to the mathematical underpinning of EAM portfolios, and too involved to address in this forum). 


There is no doubt that the thoughtful exploration and due diligence into EAM portfolios is still in the early stages. After my 10-month journey, while my confidence is high, I still have some uncertainty. Uncertainty that will not be fully resolved until there are a few years of live experience behind us. However, I cannot prevent myself from asking “what if?” 


What if Ensemble Active Management is shown to be a superior means of delivering active management? What if EAM portfolios are strong enough to re-open the active versus passive debate? What if EAM-powered active ETFs are readily available to the investing public? 


My experience tells me that ETFs, powered by an active investment approach that is equal to, or superior to, traditional active funds will disintermediate those funds within a matter of years. The ETF is simply a better wrapper, and if quality active management were available in an ETF side-by-side to a traditional fund, the ETF wins hands down. 


If a series of EAM-powered active ETFs emerged, and EAM proves over time to live up to the expectations set in the white paper, then all of those investors (and their advisors) who flocked to passive ETFs over the past decade due to higher expected returns might look to shift assets back to the active side. To put this potential asset shift into perspective, there has been more than a trillion dollars of net flows into passive investments over the past decade, and roughly a trillion dollars of outflows out of active funds. Large numbers to say the least.