The ETF Think Tank first introduced the ETF Nerd in December of 2017. The Nerd is meant to inspire engagement with the rigorous research we seek to support at the ETF Think Tank. It is also a symbol to highlight the key attributes of the ETF structure, which can provide better outcomes for investors: Transparency, Liquidity, Tax-Efficiency, and Lower Cost. When the ETF Nerd was first introduced, we used this symbol to focus on the transparency factor and evaluate a formulaic approach to quantify the diversification of an ETF portfolio. With the landscape of strategies changing rapidly and embracing more active, thematic, and niche strategies, we would like to introduce our latest Nerdy contribution: The ETF Management Matrix.
Inherency is a Nerdy Word
The ETF Ecosystem is changing rapidly; the launches in 2020 looked very different than the overall ETF landscape. Historically, diverse low-cost passive beta funds dominated the launches and the asset flows. The growth of ETFs has been synonymous with the death of active investing, but now the ETF structure is supporting the resurgence of active management. With over 2300 US listed ETFs and multiple changes in the types of ETF strategies coming to market, the ETF Think Tank has devised a new systematic way to categorize equity ETFs. In order to solve the problem of grouping ETFs to research them, The ETF Think Tank, in partnership with ETFRC.com, has devised the ETF Management Matrix:
Nerds Take the Red Pill
All research requires data, and that data must be categorized using a common nomenclature. With ETFs utilized to deliver so many different strategies, it is difficult to bucket approaches and outcomes in a systematic manner. The ETF Management Matrix embraces the transparency of the ETF structure to group all US-listed equity ETFs by comparing the investment approach to the diversification of the underlying holdings. Once these more homogenized groups are derived, then data can be used to set benchmarks for fees, assets, and many other milestones. To keep the process objective, the X axis of investment approach is defined by:
- Traditional Passive Beta – any passive ETF that tracks an index that is based solely on geography, sector, liquidity, or market cap.
- Non-Traditional Passive – any ETF that tracks a passive index and doesn’t qualify as traditional passive. This includes factor-based and so-called “Smart Beta” ETFs.
- Active – defined by the prospectus.
The Y axis is defined by our ETF Think Tank Diversification formula and ranked by percentile:
ETF Nerd Eco-Chamber
Before introducing our ETF Management Matrix, we reached out to fellow Nerds like Nate Geraci, David Nadig, Mike Akins, and Todd Rosenbluth. We always appreciate peer feedback and constructive criticism. Hopefully, this approach can set a process to start a dialogue for research and board reviews. With that said, we understand this is quite nerdy and subject to nomenclature debate, but we take pride in starting a conversation. Todd suggested that examples would help others understand the categories, so let’s wrap up with examples of the ten largest ETFs in each of our nine ETF Management Matrix categories.
Disclosure
The information provided here is for financial professionals only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.
All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed.
Examples provided are for illustrative purposes only and not intended to be reflective of results you can expect to achieve.
All investments involve risk, including possible loss of principal.
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