By |Published On: December 8th, 2014|Categories: Research Insights|

We highlighted a few weeks ago that Smart Beta is More Expensive Than You Think.

Smart Beta and other closet-indexers are everywhere, but what happened to old-fashioned high-conviction active management in the mid/large cap space? Last I checked the market isn’t totally efficient and people are still not 100% rational. It seems that there should be some opportunities for those who are prepared to demonstrate some conviction. So who are these intrepid souls?

Data:

  • ETF: Our samples of ETFs are from ETF database. We sort our samples by categories, “U.S. Equity, Large-cap, mid-cap, value, growth, and blend”. After excluding “fund of funds” and missing data, our sample include  124 ETFs.
  • Mutual Fund: Samples of Mutual funds are from Morningstar Premium Fund Screener. We use the same sorting options as the ETFs and we get 6,133 samples (missing data excluded).

Key evidence:

Focused ETF funds (with stock holdings <=50) only accounts for 8% of the funds in the universe. This percentage is consistent with the finding in the article “SEC Denies Precidian Active ETF Request.” 

  • On average, most ETFs are lower-cost index trackers, and not actively managed.
2014-11-02 17_39_12-Microsoft Excel - ETF and Mutual funds ER


The results are hypothetical results and are NOT an indicator of future results and do NOT represent returns that any investor actually attained. Indexes are unmanaged, do not reflect management or trading fees, and one cannot invest directly in an index. Additional information regarding the construction of these results is available upon request.

There is a higher percentage of mutual funds that are focused (about 23%) compared with ETFs. The average expensive ratio of focused mutual funds is 128 bps. The more “active” the fund–the higher the cost–on average.

2014-11-02 17_49_56-Microsoft Excel - ETF and Mutual funds ER


The results are hypothetical results and are NOT an indicator of future results and do NOT represent returns that any investor actually attained. Indexes are unmanaged, do not reflect management or trading fees, and one cannot invest directly in an index. Additional information regarding the construction of these results is available upon request.

There seems to be a lack of focused ETFs, but a glut of expensive focused mutual funds. When will we see active ETFs finally take off? Maybe never?

About the Author: Wesley Gray, PhD

Wesley Gray, PhD
After serving as a Captain in the United States Marine Corps, Dr. Gray earned an MBA and a PhD in finance from the University of Chicago where he studied under Nobel Prize Winner Eugene Fama. Next, Wes took an academic job in his wife’s hometown of Philadelphia and worked as a finance professor at Drexel University. Dr. Gray’s interest in bridging the research gap between academia and industry led him to found Alpha Architect, an asset management firm dedicated to an impact mission of empowering investors through education. He is a contributor to multiple industry publications and regularly speaks to professional investor groups across the country. Wes has published multiple academic papers and four books, including Embedded (Naval Institute Press, 2009), Quantitative Value (Wiley, 2012), DIY Financial Advisor (Wiley, 2015), and Quantitative Momentum (Wiley, 2016). Dr. Gray currently resides in Palmas Del Mar Puerto Rico with his wife and three children. He recently finished the Leadville 100 ultramarathon race and promises to make better life decisions in the future.

Important Disclosures

For informational and educational purposes only and should not be construed as specific investment, accounting, legal, or tax advice. Certain information is deemed to be reliable, but its accuracy and completeness cannot be guaranteed. Third party information may become outdated or otherwise superseded without notice.  Neither the Securities and Exchange Commission (SEC) nor any other federal or state agency has approved, determined the accuracy, or confirmed the adequacy of this article.

The views and opinions expressed herein are those of the author and do not necessarily reflect the views of Alpha Architect, its affiliates or its employees. Our full disclosures are available here. Definitions of common statistics used in our analysis are available here (towards the bottom).

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