For investors smitten with passive market exposure, there’s lots to love. They can flirt with a bevy of exchange-traded funds (ETFs) that track virtually any index or benchmark. Admittedly, ETFs have a lot of attractive features—perhaps most important, a high degree of diversification at low cost.
But despite the proliferation of ETFs, some investors may still not find exactly what they’re looking for in tax efficiency, benchmark exposure, or ESG criteria, for example. Maybe you’d prefer to specify the percentage of revenue from carbon emissions you want in your portfolio. Or maybe you have a concentrated stock position elsewhere in your holdings and don’t want more of the same sector or industry positions in the ETF.
For these and other reasons, a separately managed account (SMA) may be a better option to help you achieve the same passive-investing objective as an ETF—but with added benefits.
What is a separately managed account?
Like an ETF, an SMA can provide you with an index-based market exposure. The range of indexes available through ETFs is large and includes cap-weighted indexes, such as the S&P 500®, Russell 3000®, and MSCI EAFE indexes, as well as alternatively weighted indexes such as the Research Affiliates Fundamental Index. However, an even broader selection of indexes is available for separate accounts, since not all indexes are available in ETF format—for example, the Russell Defensive Equity indexes. In addition, SMAs can target blended benchmarks, and you can change this blend dynamically over time as your investment views change.
Unlike ETFs, in which the names held are fixed, SMAs can be flexible in their holdings (and still express a low tracking error to the underlying benchmark), which can result in greater tax benefits. Let’s look a bit more closely at this and other reasons to consider an SMA.
Relevance: Are your reports tailored to your responsible-investing goals?
If your aim is a fossil-free portfolio, but the reporting tells you how many gambling companies you own, this might be interesting at best but not very meaningful.
Yet even this can serve as a crucial feedback loop for investors—the initial intent may have been to divest from companies that own fossil-fuel reserves, but upon reviewing the portfolio’s holdings you might realize you’d in fact prefer to divest from fossil fuels in any capacity. In this case your portfolio’s ESG criteria might need to be rethought and redefined.
Potential Parametric solution
For more than 20 years, our Responsible Investing capability has offered a robust and continually evolving menu of ESG screens and licensed indexes, giving investors a wide range of portfolio design choices and the robust reporting to help them understand the impact their choices make. In addition, our proxy-voting guidelines follow corporate-governance best practices to safeguard shareholder capital, and they consider the relevant environmental and social implications of management and shareholder proposals.
Martha Strebinger, CFA, Senior Investment Strategist (emeritus)
Prior to leaving Parametric in December 2019, Martha was responsible for assisting in the continued evolution of Parametric’s Responsible Investing capabilities. Prior to joining Parametric in 2016, she was an investment specialist at Truepoint Wealth Counsel in Cincinnati and worked in Boston at Wellington Management Company and Grantham, Mayo, and Van Otterloo (GMO). She earned a BS in human biology, health, and society from Cornell University. A CFA charterholder, Martha is a member of the CFA Society of Seattle.
The views expressed in these posts are those of the authors and are current only through the date stated. These views are subject to change at any time based upon market or other conditions, and Parametric and its affiliates disclaim any responsibility to update such views. These views may not be relied upon as investment advice and, because investment decisions for Parametric are based on many factors, may not be relied upon as an indication of trading intent on behalf of any Parametric strategy. The discussion herein is general in nature and is provided for informational purposes only. There is no guarantee as to its accuracy or completeness. Past performance is no guarantee of future results. All investments are subject to the risk of loss.