Career in Passive Investment?

I haven't seen any posts on this anywhere so thought I would give it an ask.

With the rising popularity of ETFs etc and money moving away from active investing, there is obviously less career opportunities in active investing. Can you make a good living and career in say a huge AM's ETF arm?

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Comments (15)

Aug 27, 2018

You can definitely make a good living. And I would say that in many ways, the ETF boom is sort of just starting. The definition of "passive" vs "active" management is honestly getting blurred from a systematic/quantitative investing standpoint.

The future of ETFs is moving beyond your typical basic index fund and towards ETFs that have a specific investment objective (i.e. smart beta). ETFs for low vol/high dividends are a common one right now. But other attributes will get ETFs as well (growth vs value, etc.). Smart Beta ETF construction is actually quite interesting. Dividend ETFs want to buy stocks with high dividends but only in stocks that have a sustainable dividend. How do you systematically define what a sustainable dividend is? For a value based ETF, you want to construct a portfolio of the cheapest stocks but you don't want to buy failing companies that are cheap for a reason. How do you minimize the risk of buying stocks that seem like a good value on paper but are actually blow up risks without taking an active approach.

A lot of people are working on these thematic/factor based ETFs. Many with success. Those who figure out how to do it in a way that minimizes turnover and achieves the intended investment objective (a difficult thing to do for an ETF) will attract assets.

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Aug 28, 2018

Lol, What I don't get is this defeats the purpose of passive investment. If you are selecting a "growth" smart beta ETF that is a fuckin' active vehicle. It makes zero sense to me.

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Most Helpful
Aug 27, 2018

How so?

Fama and French demonstrated that the size (mkt cap) is important for understanding beta/risk. So, Russell 1000 ETFs simply take the top 1000 stocks and weight them in the portfolio by market cap. Entirely systematic/rules based approach that is well defined.

Smart beta ETFs behave in a similar way. Growth factors have been empirically demonstrated to have value using the framework the FF 3 factor/5 factor gave us. A simple optimization procedure on a set of growth factors will give you your portfolio.

In what way is betting on the size factor, which is what any market cap weighted passive ETF is, different from betting on the growth factor or value factor?

If you're buying an sp500 or russell 1000 tracking ETF, you're basically betting on the top 10 or 20 companies, which compose a large percentage. The bottom 250/500 stocks of sp500/russell 1000 hardly matter to the return of the index. You're basically betting that stocks with high market capitalization will do well regardless of any other important characteristic.

When it comes to systematic investing, what is "active" or "passive" is blurred. When certain factors have been proven to add value by practitioners and academics over decades of data and many market cycles, it makes little sense to pay active fees for something that can be cheaply replicated by a smart beta optimization process.

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Aug 28, 2018

Fair enough but if "systematic" investments get specific enough I think it's hard to call it "passive". It's just active investment using a "system". Either way, I get your point.

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Aug 31, 2018

It's basically impossible to be 100% passive. Unless you create some kind of global asset etf.

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Aug 30, 2018
BobTheBaker:

Lol, What I don't get is this defeats the purpose of passive investment. If you are selecting a "growth" smart beta ETF that is a fuckin' active vehicle. It makes zero sense to me.

I agree. A smart beta strategy is NOT passive investing. It is a quantitative approach to investing based a particular factor such as value/growth/small, etc. As I am sure you may know, the primary reason that the ETF/Index Fund industry has been booming over the past several years is that the fees are extremely low. You can buy into an S&P 500 ETF for next to nothing in terms of the annual expenses. I would think the Smart beta portfolios have higher fees than traditional ETFs, and as a result, you are missing the main benefit of passive investing.

Aug 31, 2018

Great thank you so much for the reply! I've read a lot about both Smart Beta and Thematic ETF's so that definitely make sense. In terms of a career, do you think it's somewhere good to start your career (e.g iShares) or is it pretty limited in terms of exit oops and may still be better to try and start in active or even S&T at a bank first?

Aug 27, 2018

Not sure on exit opps tbh. Not sure it's where I would start my career unless you're a quant who's deep on the portfolio optimization aspect of things. Despite recent trends, it's pretty much always better to have worked in active management. Switching to ETFs is probably still easier from that point. Starting out in S&T is also never a bad thing if your plan is to make a career out of working in public markets.

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Aug 28, 2018

ETF is not necessarily passive. There are tons of actively managed ETFs, aka Active ETFs.
It's a promising industry in U.S given there are more institutional inflows and passive ETF investors are riding along the bull run. However, there are also ETFs that failed miserably in the good times.
Overall, passive ETF is a vehicle that shifted investors' focus from Alpha driven to Beta driven. It's just making investment "lazier", not easier. That's my two cents about ETF. Don't get me wrong, even active fundamental AM PMs envy great thematic ETFs such as Smart Factor/Smart Beta Etfs.

I recommend patrick o'shaughnessy podcast interview with Eric Balchunas as a starter.

Aug 27, 2018

This is why I mentioned that the line between active and passive is somewhat blurred. Are there really ETFs that are based off of traditional long only fundamental stock picking?

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Aug 28, 2018
DeepLearning:

This is why I mentioned that the line between active and passive is somewhat blurred. Are there really ETFs that are based off of traditional long only fundamental stock picking?

I know there are about 200 Active ETFs in US+CAN.
I can't think of many as traditional long only fundamental.
umm...DWLD and OSCV in the States and PDF in Canada? sorry I'm not in ETF research. my knowledge can only carry me thus far.

Aug 29, 2018

There aren't much in equities, because short of a pure-stock picker who refuses to do a MF, there isn't much that can't be quantified, or tuned into a quantamental strategy, but there is more in FI and alts.

I recommend you all stay far away. Entry level opportunities in ETFs are going to dry up quickly, and you will be left holding a worthless skillset as I ply my market knowledge to ever greater heights.

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Aug 28, 2018
Whatever1984:

...
I recommend you all stay far away. Entry level opportunities in ETFs are going to dry up quickly, and you will be left holding a worthless skillset as I ply my market knowledge to ever greater heights.

What's the skillset required for entry level ETF research and what skillset can one build through 3-5 years in ETF research, or ETF product management (buy-side ETF i guess?)
Appreciate it!

Aug 31, 2018

Childhood is active investing,
Adulthood is passive investing,
But gaining your wizardry powers is discovering 3x leveraged etfs

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Aug 29, 2018
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