Are smart-beta funds active or passive? For Vanguard Group, the cost of debating that point has been nearly $800 billion.
At least, that’s how much the rest of the mutual fund industry has amassed in the investment strategies, money management’s hottest innovation since the ETF itself.
Only the smallest sliver has gone to Vanguard, thanks to years of soul-searching over how to market the concept without alienating clients trained to resist Wall Street innovations.
But the trend is no fad, and incoming CEO Tim Buckley seems finally ready to pull the trigger on smart beta ETFs in America. Competitors are watching closely, desperate to see if Vanguard has waited too long in its quest for intellectual purity to make up the five-year head start given the rest of the industry.
“Their view is that we have to be very careful in entering any space, and the terminology describing it,” said Dana D’Auria, director of research at Symmetry Partners, which oversees more than $8.5 billion. “It’s a big organization, and I don’t think there’s necessarily the same view on smart beta and factor investing across the whole organization.”
Most of the firm’s reticence has come down to a marketing debate tied to Vanguard’s core identity as an index investor. Executives have been paralyzed by the question of what to call mutual funds and ETFs that group like stocks in categories such as high-momentum or low volatility, known as investment factors.
Are they active or passive?
Outgoing CEO Bill McNabb, loath to offend a clientele that has pumped more than $4 trillion into his funds, parses the nomenclature with a deliberation that borders on goofiness.
“I’ll call them mechanical active,” McNabb says during an interview at the company’s offices. ”I don’t believe in this smart beta concept. I don’t think anything is smart about it.” On the other hand: “Some of the factor stuff, we think, is very legitimate.”
Ambivalence at the world’s second-largest asset manager has made smart beta a goldmine for everyone else. BlackRock said the category expanded at a 37 percent organic rate in 2016, making it one of its biggest growth segments.