Comparing strategic beta, active and passive

Understanding strategies within the index spectrum


Investors have long known about two distinct investment choices: active and passive strategies. With the advent of strategic beta indexes, passive strategies are no longer clearly defined. Understanding the differences between traditional index, strategic beta and active management can help you evaluate whether combining these strategies may provide an additional level of diversification for your portfolio.

Investment strategy comparison

The table below highlights many of the differences across the passive/active spectrum.

  Traditional indexing Strategic beta indexing Active strategies
  • Seeks to provide cost-effective beta exposure to market segments
  • Seeks to improve returns or potentially reduce risk relative to traditional market-cap indexes
  • Seeks to outperform a benchmark index on a risk-adjusted basis
Index construction
  • Index selects and weights constituents based on market capitalization
  • Index naturally leans toward larger companies within the respective indexes
  • Index selects or weights constituents based on non-market-cap metrics
  • Index may tilt toward desired factors or objectives
  • An index is provided as a benchmark against which fund performance is measured
Investment discipline
  • Seeks to track the returns of the index (minus fees and expenses)
  • Limited number of annual rebalances of the underlying fund holdings
  • Seeks to track the returns of the index (minus fees and expenses)
  • Limited number of annual rebalances of the underlying fund holdings
  • Managers have active discretion over investment selection and weighting within a portfolio
  • Rebalancing portfolio can vary due to manager buy/sell discipline
Potential tax impact
  • Generally considered more tax efficient versus active because of lower portfolio turnover
  • Generally considered more tax efficient versus active due to less portfolio turnover
  • Tax efficiency can vary by strategic beta index due to the rebalancing frequency
  • Typically not tax efficient due to manager buy/sell discipline
  • Certain asset class types may be more tax oriented
Costs and performance
  • Low-cost strategy is due to general ease of approach
  • Performance is expected to track index returns (minus fees and expenses)
  • Costs vary by exposure and complexity of index strategy
  • Performance is expected to track index returns (minus fees and expenses)
  • Generally the most expensive strategy because of manager skill and discretion
  • Performance over time for active managers may differ from that of the benchmark index

This is not an all-inclusive list of the differences between strategies.
This is a generalization of the strategies and is being presented for illustrative purposes only.



Schwab Asset Management has long been a proponent of considering traditional indexing, strategic beta and active management as complements rather than competing strategies. We believe that combining these three strategies can add additional diversification to portfolios. The most important consideration for investors is to understand their investment objectives and how these different strategies can help.

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What makes the Schwab Ariel ESG ETF different from traditional ETFs?

Traditional ETFs tell the public what assets they hold each day. This fund will not. This may create additional risks for your investment. For example:

  • You may have to pay more money to trade the fund’s shares. This fund will provide less information to traders, who tend to charge more for trades when they have less information.
  • The price you pay to buy fund shares on an exchange may not match the value of the fund’s portfolio. The same is true when you sell shares. These price differences may be greater for this fund compared to other ETFs because it provides less information to traders.
  • These additional risks may be even greater in bad or uncertain market conditions.
  • The ETF will publish on its website each day a “Proxy Portfolio” designed to help trading in shares of the ETF. While the Proxy Portfolio includes some of the ETF’s holdings, it is not the ETF’s actual portfolio.

The differences between this fund and other ETFs may also have advantages. By keeping certain information about the fund secret, this fund may face less risk that other traders can predict or copy its investment strategy. This may improve the fund’s performance. If other traders are able to copy or predict the fund’s investment strategy, however, this may hurt the fund’s performance.

For additional information regarding the unique attributes and risks of the fund, see Proxy Portfolio Risk, Premium/Discount Risk, Trading Halt Risk, Authorized Participant Concentration Risk, Tracking Error Risk and Shares of the Fund May Trade at Prices Other Than NAV in the Principal Risks and Proxy Portfolio and Proxy Overlap sections of the prospectus and/or the Statement of Additional Information.

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