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Active vs. passive: It's not binary

In the real world, most decisions you face are not binary. Why should that be any different when it comes to building a portfolio? So with regard to the age-old active versus passive management debate, I don’t think it’s a simple either-or proposition. Significantly more nuance and con­templation is required. Rather than a focusing on labels, astute goals-based investors should step back to:

1) consider near- and long-term investment objectives and

2) determine how different approaches can work in tandem to move toward those goals

Only in such a holistic context can investors begin to assemble port­folios with the appropriate building blocks (i.e. investment products) that may offer the greatest probability for success. In all likelihood, inves­tors will find that there’s room for both passive and specialized active strategies, as well as some potentially promising approaches that bridge the gap between the two.

One such blended approach that’s gaining popularity, and in some cases notoriety, is strategic beta. Often called smart beta, it refers to a group of indexes and related investment products that aim to provide an alternative to traditional market-cap weighting strategies of passive investments.

The strategic/smart beta category has grown rapidly due to its potential to deliver on the coveted benefits of skilled active management, primarily alpha¹ generation and risk reduction, but in a wrapper that also has some of the attractive attributes of passive approaches, not the least of which are low relative costs. It’s easy to see why investors might be interested in these investments.The new reality

However, it’s important to remember that strategic beta is not “one” thing. It should not be viewed as an asset class. In reality, the strategic beta umbrella covers a diverse array of approaches. Used appropriately, it has the potential to effectively supplement both skilled active management and traditional passive strategies that may help solve for any number of vexing in­vestor challenges. But care is required because allocating to strategic beta is not a simple asset allocation decision. Rather, selecting individual strategic beta products and incorporating them in a portfolio is a careful process made in the context of specific investor goals and risk budgets.

Remember, investors always are trying to balance three critical components: return, risk, and cost. In terms of returns, more is better. In terms of risk and costs, less is more. By providing a disciplined, active-like approach to passive investing that balances return, risk, and cost, strategic beta may provide transparent exposure to a portfolio of preferred factors² and intuitive tilts. And as a strategic tool, it may enhance a passive allocation and counterbalance some of the inherent biases and other limitations of traditional cap-weighted indexing, while striving to deliver alpha at lower costs than active strategies.

Thus the ability to bridge the gap between active and passive explains the appeal of strategic beta. Of course it’s important to reiterate here that the strategic beta universe covers an array of invest­ment philosophies, so before incorporating it into a portfolio, investors must understand the rules, underlying approach and objectives used by each strategic beta product. Arbitrarily trying to fill an allocation bucket with random strategic beta funds can have unwanted ramifica­tions. Such a short-sighted approach could skew the portfolio with sector biases or inadvertently double down on unintended factor exposures. That said, in the right circumstances and after careful due diligence, I believe that certain strategic beta strategies could prove helpful in an investors’ portfolio.



1. Alpha represents the excess return of an investment relative to its benchmark.

2. Factors refer to widely accepted investment characteristics or attributes that investors often seek to isolate in an effort to capture higher returns.

An investor should consider the fund’s investment objectives, risks, charges and expenses carefully before investing or sending money. This and other important information about the fund can be found in the fund’s prospectus, or, if applicable, the summary prospectus. To obtain a copy, click here. Read the prospectus carefully before investing. 

Investing involves risk, including the potential loss of principal. Diversification and asset allocation do not guarantee a profit or protect from loss in a declining market. There is no guarantee that a strategic beta strategy will be successful. There can be no assurance that performance will be enhanced or risk will be reduced for funds that seek to provide exposure to certain quantitative investment characteristics (“factors”). Exposure to such investment factors may detract from performance in some market environments, perhaps for extended periods. In such circumstances, a fund may seek to maintain exposure to the targeted investment factors and not adjust to target different factors, which could result in losses. The annual management fees of ETFs may be substantially less than those of active mutual funds. Buying and selling shares of ETFs will result in brokerage commissions, but the savings from lower annual fees can help offset these costs. Active funds typically charge more than index-linked products for the increased trading and research expenses that may be incurred. 

VictoryShares ETFS are distributed by Foreside Fund Services, LLC. Victory Capital Management Inc. is the adviser to the VictoryShares ETFs. Victory Capital is not affiliated with Foreside Fund Services, LLC.


©2018 Victory Capital Management Inc.

Consider the investment objectives, risks, charges and expenses of the funds carefully before investing. Download a prospectus or summary prospectus, if available, containing this and other important information for USAA mutual funds from, for Victory mutual funds from, or for VictoryShares and VictoryShares USAA ETFs from Read it carefully before investing.

Investments involve risk including possible loss of principal. The value of the equity securities in which the fund invest may decline in response to developments affecting individual companies and/or general economic conditions. Dividends are never guaranteed. International investing involves special risks, which include changes in currency rates, foreign taxation and differences in auditing standards and securities regulations, political uncertainty, and greater volatility. Emerging markets involve heightened risks related to the same factors as well as increased volatility and lower trading volume. You may lose money by investing. There are no guarantees the funds will achieve their investment objectives and strategies may be unsuccessful.

Investments in bank loans may at times become difficult to value and highly illiquid; they are subject to credit risk such as nonpayment of principal or interest, and risks of bankruptcy and insolvency. Fixed income securities are subject to interest rate, inflation, credit and default risk. The bond market is volatile. As interest rates rise, bond prices usually fall, and vice versa. The return of principal is not guaranteed, and prices may decline if an issuer fails to make timely payments or its credit strength weakens.

ETFs have the same risks as the underlying securities traded on the exchange throughout the day. Redemptions are limited and often commissions are charged on each trade, and ETFs may trade at a premium or discount to their net asset value. There can be no assurance that an active trading market for shares of an ETFs will develop or be maintained. The ETFs are not actively managed and may be affected by a general decline in market segments related to the Indexes. The ETFs invest in securities included in, the Index, regardless of their investment merits. The performance of the ETFs may diverge from that of the Indexes. 

Fixed income securities are subject to interest rate, inflation, credit and default risk. The bond market is volatile. As interest rates rise, bond prices usually fall, and vice versa. The return of principal is not guaranteed, and prices may decline if an issuer fails to make timely payments or its credit strength weakens.

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This material does not constitute a distribution, offer, invitation, recommendation, or solicitation to sell or buy any securities; it does not constitute investment advice and should not be relied upon as such.  Investors should seek independent legal and financial advice, including advice as to tax consequences, before making any investment decision.

Victory Capital means Victory Capital Management Inc., the investment manager of the USAA Mutual Funds and VictoryShares USAA ETFs. Victory Mutual Funds and USAA Mutual Funds are distributed by Victory Capital Advisers, Inc. (VCA). VictoryShares ETFs and VictoryShares USAA ETFs are distributed by Foreside Fund Services, LLC (Foreside). VCA and Foreside are members of FINRA and SIPC. Victory Capital Management Inc. (VCM) is the investment adviser to the Victory Mutual Funds, USAA Mutual Funds, VictoryShares ETFs, and VictoryShares USAA ETFs. VCA and VCM are not affiliated with Foreside. USAA is not affiliated with Foreside, VCM, or VCA. USAA and the USAA logos are registered trademarks and the USAA Mutual Funds and USAA Investments logos are trademarks of United Services Automobile Association and are being used by Victory Capital and its affiliates under license.

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