A new index launched by Standard & Poor’s on Tuesday combines the features of active and passive investing strategies, targeting investors who want higher than index returns but lower fees than mutual funds.

The S&P/TSX 60 130/30 Strategy Index utilizes an index strategy which gives additional weighting to top performing constituents and decreased position to the weakest performing stocks in the index, providing the prospect of outperforming the index.

Under the strategy, Standard & Poor’s assesses such factors as stocks’ capitalization rates, earnings quality and equity analyst recommendations. The stocks determined to be the 10 top performers in the index each have their respective weights increased by 3% relative to the S&P/TSX 60, while the 10 weakest performing stocks each have their weights decreased by 3%. The index is rebalanced quarterly.

By including characteristics of both active and passive investment strategies, the index creates an investment option outside of strictly active, or strictly passive strategies, according to Srikant Dash, head of global research and design at S&P Indices.

“This product sits somewhere in between,” explains Dash. “It’s an enhanced index strategy that offers the prospect for risk-controlled alpha versus the benchmark index, within a transparent index-like framework and low-cost framework.”

S&P Indices has licensed AlphaPro Management Inc. to create and launch an exchange-traded fund based upon the S&P/TSX 60 130/30. AlphaPro filed a preliminary prospectus for the ETF in mid-December.

Financial advisors could use this new ETF as part of a core Canadian equity holding in clients’ portfolios, according to Dash. While the 130/30 strategy is commonly associated with hedge funds, Dash says the S&P/TSX 60 130/30 Strategy Index should not be considered an alternative investment.

“It’s expected to give incremental alpha versus the benchmark index, so it really belongs to the Canadian equity core allocation of a portfolio, not the alternative allocation of a portfolio,” he says.

He expects the new ETF to appeal to investors who typically buy mutual funds, but are frustrated by high fees and the fact that a majority of investment managers fail to outperform the benchmarks. Mutual fund investors might be reluctant to switch to pure passive products that produce only average index returns, but Dash says they would likely see value in index-based products that offer alpha.

“They don’t want to take the risk of underperforming, but they want the opportunity to outperform,” he says. “This is sort of a middle ground.”

Dash expects investors to gradually begin demanding more products of this type as they seek alternatives to mutual funds. But he says it will take time for retail investors to become educated and comfortable enough to use products that employ complex strategies such as 130/30.

“It’s something that will need a fair bit of education,” says Dash. “It’s going to take time.

One of the first steps in this educational process, he says, is for financial advisors to become familiar with these types of strategies. “They have to do their due diligence; they have to understand the product,” he says.

IE