Not all passive funds are created equal. The most popular style is market weighted indexing, which was made popular by and is dominated by Vanguard. But other styles have emerged which try to beat the market — so-called “smart beta,” with DFA as the poster child.
Using different ways to weight the market — P/E ratios or dividends like Wisdom Tree, for example — as well as more efficient trading techniques, these firms tout better performance. Then there are ETFs, which promise lower costs because of their more efficient wrapper.
But is smart beta really passive? Some assert that there is no such thing as a passive TDF because someone has to pick the glide path even if the underlying investments are passive. (We posted about this earlier this week, here.) Though firms like DFA, Wisdom Tree and Research Affiliates do not analyze and pick individual stocks like active fund managers do, they do use quantitative analysis to try to beat the market. Vanguard reviews some of these alternative indexing strategies and, not surprisingly, questions whether the results are worth the risk.
