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Image of title: A smarter approach to beta


Leveraging the goals of both active and passive management, strategic beta may offer an attractive alternative for investors seeking inexpensive, diversified equity exposure with market-beating potential.

Strategic beta strategies, such as Manulife ETFs, seek to improve upon market capitalization-weighted strategies by tracking a custom index that combines active management insight with the discipline of a rules-based approach.

image that shows passive versus active management.

Passive investment vehicle – Offering investors the low cost and transparency of a rules-based approach
Active insight – Offering investors the potential for outperformance by emphasizing specific segments of the market

Source: Manulife Investments. For illustration purposes only.

How they stack up: Passive vs. active

Traditional market cap-weighted index-tracking funds have provided investors with easy, low-cost access to broad market exposure for more than 40 years. While their virtues are significant, these passive funds aren’t as intrinsically neutral as they might appear.

Market-cap weighting biases large caps

Market-cap weighting, the methodology used by many traditional market indexes, places greater emphasis on shares of larger, more expensive companies. This can produce unintended risk concentrations at particularly inopportune times.

These indexes also inherently neglect the equity of smaller, potentially more promising firms in favour of those larger-cap companies that have already experienced significant growth. This may cause investors to forfeit the potential for relative outperformance.

Active management comes at a higher cost

Active management, on the other hand, allows for outperformance potential, but it’s generally more costly to implement than passive exposure. Furthermore, active manager relative returns can sometimes be explained by market factor exposures rather than by security selection.

Image with text describing ETF types – Passive – Tracks an index, Active - stock picking and qualitative,  Strategic Beta

Best of both worlds: Strategic beta with a multifactor approach

By attempting to sidestep the drawbacks of cap-weighted indexing and active management, strategic beta aspires to offer the best of both approaches:

  • the potential for outperformance by emphasizing specific segments of the market
  • the low cost and transparency of a rules-based indexing approach

Multifactor investing traces its roots to the academic research of Nobel laureate Eugene Fama and renowned researcher Kenneth French*, among others. Their premise is simple: no single factor could sufficiently explain the cross-section of expected stock returns.

Dimensional Fund Advisors, in turn, leveraged this academic research, and have identified four factors, or dimensions: overall market, company size, relative price and profitability.

Manulife ETFs apply a multifactor approach, a vigorous form of return-oriented strategic beta investing. A multifactor approach pursues more than one type of premium rather than relying exclusively on a single factor.

Help diversify your risk with a multifactor approach

Deliberately combining multiple complementary factors into one ETF can be a more comprehensive and consistent method of investing than choosing among a sea of single-factor approaches. A multifactor approach can help diversify the risk of having concentrated exposure to a single factor at the wrong time.

Image of yearly premiums. The chart illustrates that factors are not perfectly correlated, therefore the importances of diversification. 1964-2017
Source: John Hancock Investments, Morningstar/Ibbotson, Professor Kenneth R. French, mba. Tuck. Dartmouth. Edu/pages/faculty/ken. french/data library. html, 2016, 2016. The data shown above reflects the historical differences in performance between market factors.For example, the data presented in “Equities minus T-bills” represents the historical return for equities minus the historical return for U.S. Treasury bills by calendar year since 1964, the first year when reliable data was available for all four sets of comparisons. This data does not portray results of indexes. Past performance does not guarantee future results.

Of course, more factors aren’t necessarily better than fewer factors. What’s important is understanding the specific purpose of each factor in the portfolio and how those factors interact with one another in different market environments.

Building a better index: The evolution of strategic beta

Manulife ETFs seek to take advantage of the latest advancements in strategic beta to help increase the probability of outperformance versus traditional market cap-weighted benchmarks.

How is this accomplished? A four-step process:

    1. Strategically select factors that have demonstrated the potential for higher expected returns.
    2. Narrow the investment universe or scope.
    3. Design an index that overweights securities in favour of the desired factors.
    4. Implement and trade in a cost-effective and thoughtful manner to capture as much of the factor/premium as possible.

Image of the evolution of stategic beta. From Passive traditional Market-cap weighted to Alternative weighted to single factor to multi factor to multi dimentional today.

Find out what factors matter

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