Strategic Beta: The best of both worlds?
There’s been plenty of debate about active vs. passive investing. On the ‘active’ side, you can point to the benefits of finding new sources of return, actively managing risk and extending a portfolio’s reach. On the ‘passive’ side, you can make the case for achieving market exposure cheaply and efficiently in certain markets.
A closer look at active investing
Active investing has advantages, but requires both skill and discipline. The premise behind most actively managed strategies is that by using detailed analysis to focus on certain securities or segments of the market, portfolio managers have the ability to identify mispricings in securities, and a portfolio has the potential to outperform the broad-based market over time. The challenge with this approach is that it requires asset managers with the necessary expertise to accurately assess market conditions or mispricings over long stretches of time.
A closer look at passive investing
Passive investing offers a convenient and generally low-cost way of introducing market exposure (or beta) into a portfolio. That’s one of the main reasons ETFs have become so popular, but it’s an approach that often comes with limitations. Many passive ETFs track an index that is market capitalization weighted. What does that mean? It means that they give more weight to larger companies than smaller ones. These ETFs are essentially neglecting the equity of smaller, potentially more promising firms.
So what’s the best choice?
The best choice may be when you don’t have to choose.
Strategic beta offers an attractive alternative for investors seeking low-cost, diversified equity exposure. In short, strategic beta leverages the goals of both active and passive management.
From an active perspective, it offers the potential for outperformance by emphasizing specific segments of the market. From a passive perspective, strategic beta follows a rules-based, highly transparent and lower-cost approach to investing.
Passive investment vehicle – Offering investors the low cost and transparency of a rules-based approach
Active insight – Offering investors the potential for outperformance by emphasizing specific segments of the market
Source: Manulife Investments. For illustration purposes only.
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