Many investors follow Warren Buffett with the goal of uncovering secrets to investing. But no such secrets exist, says Larry Swedroe, director of research at BAM Alliance. Buffett has earned his success, but it's attributable to identification of key characteristics that can deliver above-market returns. These are not hidden. There is now even a term for it, which Swedroe, among others, has written about: factor-based investing.
Smart investors now know they don't have to pay active managers to identify factors that can lead to outperformance. The market continues to see a huge shift in investor interest away from higher-fee active investing and into lower-cost, market-weighted core equity index funds.
Investing in an S&P 500 index fund works, as Buffett reminds investors often — and he has long said it's getting harder to beat. The massive outflows from actively managed mutual funds is not slowing. In 2016 index fund king Vanguard saw more net inflows than all of its active fund company competitors combined — $289 billion to $244 billion.
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But the popularity of factor-based investing and smart beta ETFs show that there are additional ways to invest without paying an active manager. Inflows to smart beta ETFs exceeded $52 billion in 2016, and total smart beta assets hit $559 billion by the end of the year, according to Morningstar. Smart beta ETFs go back at least a decade, and hundreds of options exist under the umbrella — depending on your exact definition.
After eight consecutive years of a bull market that has returned 250 percent for the S&P 500 since the recession ended in 2009, it makes sense to be worried about a downturn. That can make active management seem appealing. Active managers certainly want to entice investors using that fear. And down markets are when active manager tend to do better versus an index.
Here are a few ideas that fall under the broad smart beta umbrella that can bridge the gap between traditional core market-weighted equity index investing and ideas more often associated with active managers.