Asset Management

Asset Management
Register

Comparing strategic beta, active and passive

Understanding strategies within the index spectrum
Print View

Introduction

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 indexingStrategic beta indexingActive strategies
Overview
  • 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 strategies because of lower portfolio turnover
  • Generally considered more tax efficient versus active strategies 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.

 

Summary

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.

Stay informed. Subscribe Today. Sign up now >

What to read next

Discover ETF Know:How

Browse our full-spectrum curriculum of ETF tools and resources designed to help you boost your knowledge and gain a competitive advantage.

How to evaluate ETFs

Follow this three-step framework to help choose ETFs for your client portfolios.

Explore Schwab ETFs

Help your clients get exceptional value from their investments with the product finder.

Featured products

FNDX

Schwab Fundamental U.S. Large Company ETF

SCHR

Schwab Intermediate-Term U.S. Treasury ETF