Passive investing is all the rage, taking market share from active funds. But will the new class of passive investments — called “factor” investing or “smart beta” — start to steal market share from their kissing cousins? The answer is yes, according to BlackRock, Schwab and Northern Trust. All three have recently launched smart beta ETFs that take into account value, profitability, size and momentum.
The king of smart beta is DFA, which enjoyed $11 billion in flows for the first half of 2013 — trailing only PIMCO and Vanguard. But better results takes patient investors, who seem ripe for the DC market, where participant inertia sometimes serves the same purpose. Low cost is still the key for DFA and other smart beta which, at an average of 33 BPs for DFA’s funds, is much lower than most active managers but higher than traditional passive plays.
