ETFs» robust growth has been fueled by three drivers: a push by investors into low - cost vehicles, which increasingly has meant passive investing
versus traditional active management; a move by investors who formerly bought single stocks or bonds into macro-theme ETFs; and institutions seeking passive exposure by using ETFs instead of over-the-counter swaps and other products they traditionally employed.
Withdrawal of brokerage firms from the equity research business + downward pressure on fees + investor reallocation toward index investing have
made traditional active management considerably less lucrative than it was during my working career.
As you consider migrating your public equity holdings away
from traditional active management to smart beta, two portfolio construction questions come to the fore: which smart beta strategies should you include, and how should you manage those strategy allocations through time?
Like active funds, these strategies may seek to add alpha, reduce risk or increase diversification beyond a standard benchmark, at a lower cost than
traditional active management, but higher than true passive investing.
Traditional active management?
As the trend cuts into
the traditional active management business, «the financial industry is having its Napster moment,» Balchunas said, making an analogy to how free music file - sharing savaged the music industry.