One small step for Charles Schwab, and another leap forward for smart beta.
The metaphor is mixed, but it seems to fairly signal a significant new endorsement for an alternative indexing strategy that has been gaining ground by leaps and bounds.
So-called smart beta’s latest advance comes from Charles Schwab Investment Management (CSIM), one of the nation’s largest asset managers, which earlier this year changed the formula of its popular MarketTrack Portfolios to include an allocation to fundamentally weighted indexes.
CSIM has offered investors four MarketTrack funds — all-equity, growth, balanced and conservative — since 1995.
But in January the asset manager shifted the heretofore 100% cap-weighted index funds to a blend including a 30% to 35% allocation to smart beta. The result is a first-of-its-kind hybrid cap-weighted/smart beta product.
Given the MarketTrack funds’ $2 billion size, the switch implies a $600 million-plus shift into the burgeoning smart-beta space, which recent estimates have put at $360 billion.
The reason for the move?
“Fundamentally weighted indexing over the longer term has outperformed cap-weighted indexes,” John Sturiale, who leads CSIM’s product management team, tells ThinkAdvisor in a phone interview.
If smart beta outperforms, as proponents such as Rob Arnott’s Research Affiliates have long been saying, then why not allocate 100% of the funds’ investments to fundamental indexing?
Answers Sturiale: “No. 1, we can’t forecast the future. No. 2, investors should be cost conscious, and cap-weighted indexing allows you to [minimize] costs.”
In short, Schwab believes the two strategies that many view as competing with one another are complementary—that investors can actually improve their portfolios’ risk-return characteristics by combining them.