Active / Passive
Numerous studies have concluded that over a long investment time horizon, most active managers do not exceed benchmark returns. The logical conclusion: if an active manager can’t beat the stated benchmark on an after-fee basis, wouldn’t investors be better off simply buying an index fund with lower costs and less individual stock or bond risk?
For the past 20 years or so, the increasingly popular answer is ‘yes’, and the rapid growth of ETFs has supported this. When ClearRock created our first managed all-ETF portfolios back in 2007, the entire global ETF market totaled $600 billion represented by approximately 1,100 ETFs. (Source: ETFR, December, 2019)
Twelve years later, the market has mushroomed to over $3 trillion. Bank of America recently predicted that the global ETF market could reach $20 trillion by 2030. Relatively few firms have as much experience as ClearRock designing and implementing client portfolios using solely ETFs.
Today there are over 6,500 ETFs globally, making the selection of ETFs – much less building an all-ETF portfolio — extremely challenging for the average investor or inexperienced investment advisor. Along with this explosive growth, many new styles of ETFs have emerged, including an exciting trend: the evolution of actively managed ETFs. In other words, ETFs that focus on specific attributes of a company or bond.
Now, there are ETFs that seek to isolate factors such as companies who pay the highest dividends or have low levels of volatility. There are now bond ETFs whose managers have the ability to tactically shift the portfolio based on their outlook for interest rates or credit quality. In short, ETFs are starting to look more like low-cost versions of mutual funds.
ClearRock has monitored this evolution closely over the past few years. After rigorous research, planning, analysis and stress-testing, we are proud to announce that we are introducing a new suite of portfolios that combine the best of our tactically managed all-ETF portfolios with some of these actively managed ETFs. We call these new portfolios: ClearRock Dynamic.
While most managers don’t beat their benchmarks, there is a small number that consistently have. (Source: S+P SPIVA Analysis, 2019) In the past, the cost to access these managers through traditional mutual funds or separately managed accounts did not outweigh our concerns about costs, taxes, and lack of transparency. With the advent of active ETFs, we now think the equation has swung in favor of investors.
With US financial markets at or near record highs it could be increasingly difficult to sustain the level of returns investors have enjoyed over the past decade. We believe a blend of active and passive ETFs may afford us the opportunity to achieve higher-than-benchmark returns in this environment. A 2010 study by Arnerich, Massena and Associates, “Active Vs. Passive Investment Management” concluded that at the top of an economic cycle, active managers can add value and have increasingly outperformed in down markets over the past 35 years.
ClearRock will seek to identify and monitor those managers of active ETFs who have consistently outperformed their benchmarks and blend those ETFs into our existing portfolios. Just like our current portfolios, these portfolios span the risk spectrum: Conservative, Moderate, and Aggressive. We also have created a Diversified income Dynamic portfolio for those seeking income as a primary objective.
ClearRock has exercised a disciplined and systematic investment process over the past twelve years. At the core of this process is our investment philosophy: 1. Wealth accumulation is a long-term endeavor; 2. Diversification works; and 3. An all-ETF portfolio is preferable to individual securities. In a low-interest rate, and possibly low return environment, we believe it’s more critical than ever to optimize portfolio returns to address each client’s unique investment goals. By carefully managing both active and passive ETFs, ClearRock seeks to enhance our clients’ risk/return equation over time.
What You Should Do Next:
- Contact us with any questions about ClearRock Dynamic portfolios.
- Click here to learn more about the ClearRock approach and process.
- Click here to learn more about the ClearRock investment philosophy.
- Speak with one of our Senior Advisors.
Some material in this article is based on information from a variety of sources we consider reliable, but we do not represent that the information is accurate or complete. The material provided herein is for informational purposes only. Due to various factors, including changing market conditions, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this article serves as the receipt of, or as a substitute for, personalized investment advice from ClearRock Capital, LLC. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. A copy of our current written disclosure statement discussing our advisory services and fees is available for review upon request.