Larry, this framework is long overdue. The active/passive binary has been a blunt instrument for years, and conflating systematic factor strategies with discretionary stock-picking has done real damage to how advisors evaluate and communicate the investment process. Anchoring on Fama's definition — individual stock selection and/or market timing — is the right scalpel. For our part, we brought a concentrated equal-weight thesis to Bloomberg and jointly developed an index around it — so when we say our strategy meets all four of your systematic criteria, the rules aren't ours alone. The most common objection we still encounter is "that sounds active." The vocabulary problem is real, and it costs investors.
Appreciated — and the practitioner experience backs you up. The vocabulary gap isn't just semantic; it shapes how advisors evaluate strategies and how clients understand what they own. The sooner "systematic" becomes a standard category, the better served everyone is. Happy to share what we've built if you're ever curious about a real-world example of your framework in action.
Larry, how would you classify a rules‑based strategy that systematically sells stocks when they show negative momentum and later buys them back once an uptrend is established? On one hand it’s clearly a form of market timing, but on the other it’s fully systematic and pre‑defined rather than discretionary. In your framework, does such a rules‑based timing approach still fall into the “speculation” bucket, or can it be viewed as a legitimate factor strategy alongside traditional momentum? Thank you!
Factor funds and stock pickers in the same bucket is sloppy data. The systematic factor sleeve grades on a totally different rubric. Anyone running performance attribution sees it immediately.
Someone has already made this point in the comments, but I want to reiterate it. If systematic is differentiated from active, then the case for active would be worse off. However, that shouldn’t be the reason not to re-classify it. Systematic vs Active is more forthcoming and would be net positive for the investors at large.
Removing systematic funds / ETFs from the active side of the SPIVA dataset would make the systematic side destroy the active side so badly that SPIVA might not be necessary for very long.
Thank you for clearing up a question I have had for years. Something just did not seem right with the categories. Keep putting out the excellent work !!!!
Thank you for calling this out so clearly. I've had discussions with Bogleheads and that darn SPIVA study and their narrow definition of "passive index funds" always keeps them from considering other academically-rigorous systematic funds. It's long overdue, and I hope your article spurs a different batch of studies to compare funds based on this more accurate grouping.
I have a feeling if we separated Systematic from Active, and compared each group to the most often quoted semi-systematic index, the S&P 500, we'd find there are more systematic funds beating the S&P 500 over the long haul than we've been led to believe by lumping them in with active funds.
It's no wonder that two of the three primary indices quoted in the news every day are created by S&P Global — the "SP" part of the SPIVA study. S&P has a strong financial interest in promoting funds that rely on their indices. They've been wildly successful in making this the default for everyone's 401k and for financial advisors to recommend to clients. It's nearly religion at this point.
I like your four criteria for the Systematic label. However, there are funds that have algorithmic rules for market timing — either fully getting out of the market based on momentum and/or volatility, or rotating to more defensive sectors. I would argue if these rules are strictly followed, these funds are still Systematic, and not subject to manager discretion.
Thank you again for this piece. Let's hope it triggers a movement toward accuracy in labels.
agree completely with your definitions and would certainly include CTAs and similar trend following strategies as systematic.
Sadly the religious fanatics at Bogleheads cannot differentiate between ACTIVE investors and ACTIVE funds. Basically all funds include all index funds except TSM are active in their fund construction rules, but the index funds are systematic in implementation. That is literally no different than DFA or Avantis or AQR funds, they just cannot admit it!
Larry, this framework is long overdue. The active/passive binary has been a blunt instrument for years, and conflating systematic factor strategies with discretionary stock-picking has done real damage to how advisors evaluate and communicate the investment process. Anchoring on Fama's definition — individual stock selection and/or market timing — is the right scalpel. For our part, we brought a concentrated equal-weight thesis to Bloomberg and jointly developed an index around it — so when we say our strategy meets all four of your systematic criteria, the rules aren't ours alone. The most common objection we still encounter is "that sounds active." The vocabulary problem is real, and it costs investors.
completely agree which is why I wrote the article.
To try and clarify the distinction
Appreciated — and the practitioner experience backs you up. The vocabulary gap isn't just semantic; it shapes how advisors evaluate strategies and how clients understand what they own. The sooner "systematic" becomes a standard category, the better served everyone is. Happy to share what we've built if you're ever curious about a real-world example of your framework in action.
Stock picking is still stock picking - whether stocks are chosen by a manager or by a factor, created by college alumni.
Larry, how would you classify a rules‑based strategy that systematically sells stocks when they show negative momentum and later buys them back once an uptrend is established? On one hand it’s clearly a form of market timing, but on the other it’s fully systematic and pre‑defined rather than discretionary. In your framework, does such a rules‑based timing approach still fall into the “speculation” bucket, or can it be viewed as a legitimate factor strategy alongside traditional momentum? Thank you!
Factor funds and stock pickers in the same bucket is sloppy data. The systematic factor sleeve grades on a totally different rubric. Anyone running performance attribution sees it immediately.
Someone has already made this point in the comments, but I want to reiterate it. If systematic is differentiated from active, then the case for active would be worse off. However, that shouldn’t be the reason not to re-classify it. Systematic vs Active is more forthcoming and would be net positive for the investors at large.
Removing systematic funds / ETFs from the active side of the SPIVA dataset would make the systematic side destroy the active side so badly that SPIVA might not be necessary for very long.
Thank you for clearing up a question I have had for years. Something just did not seem right with the categories. Keep putting out the excellent work !!!!
Thank you for calling this out so clearly. I've had discussions with Bogleheads and that darn SPIVA study and their narrow definition of "passive index funds" always keeps them from considering other academically-rigorous systematic funds. It's long overdue, and I hope your article spurs a different batch of studies to compare funds based on this more accurate grouping.
I have a feeling if we separated Systematic from Active, and compared each group to the most often quoted semi-systematic index, the S&P 500, we'd find there are more systematic funds beating the S&P 500 over the long haul than we've been led to believe by lumping them in with active funds.
It's no wonder that two of the three primary indices quoted in the news every day are created by S&P Global — the "SP" part of the SPIVA study. S&P has a strong financial interest in promoting funds that rely on their indices. They've been wildly successful in making this the default for everyone's 401k and for financial advisors to recommend to clients. It's nearly religion at this point.
I like your four criteria for the Systematic label. However, there are funds that have algorithmic rules for market timing — either fully getting out of the market based on momentum and/or volatility, or rotating to more defensive sectors. I would argue if these rules are strictly followed, these funds are still Systematic, and not subject to manager discretion.
Thank you again for this piece. Let's hope it triggers a movement toward accuracy in labels.
agree completely with your definitions and would certainly include CTAs and similar trend following strategies as systematic.
Sadly the religious fanatics at Bogleheads cannot differentiate between ACTIVE investors and ACTIVE funds. Basically all funds include all index funds except TSM are active in their fund construction rules, but the index funds are systematic in implementation. That is literally no different than DFA or Avantis or AQR funds, they just cannot admit it!
What a great reminder. Blow past all the complexities and THIS, in all its elegant simplicity, is what really matters. Well done, Larry!