Exchange traded funds (ETFs) are currently all the rage. One reason why that might be the case is that they are still index or strategy-based investments. Therefore the composition of the ETF portfolio is solely model driven. This quantitative approach has been catching on with both ETFs and open-end mutual funds. Despite their increased media mindshare ETFs still trail traditional mutual funds in terms of assets under management: $324 billion vs. $9,316 billion. (via

We previously posted on how investors can go about tracking down mutual funds from entrepreneurial and innovative fund managers. One fertile area for research are these quantitatively managed funds. Reginald Laing at looks at their favorite quant funds. Maybe more important than their actual fund recommendations may be the reason why quant funds may be an attractive path to follow.

Quant funds have a lot of intuitive appeal. First, they strip away at least some of the human bias that trips up active managers, who often buy into market trends at precisely the wrong time and overlook real values. Also, quant models allow a manager to sift through thousands of securities and pick out ones that have the characteristics, or factors, he thinks are predictive of high future returns. What takes a model minutes to compute would take a team of analysts weeks–time for market conditions to change and discovered opportunities to disappear. Moreover, managers who have faith in their quant models are unlikely to deviate from their strategies, thereby avoiding the inconsistency that hurts many active managers.

Given the relative success of quantitative methodologies in other fields we should not be all that surprised that the same processes may work in investing. Douglas Heingartner in an interesting piece at the New York Times uses research on management decision making to examine the growing influence of quantitative methods.

The main reason for computers’ edge is their consistency — or rather humans’ inconsistency — in applying their knowledge.

“People have a misplaced faith in the power of judgment and expertise,” said Greg Forsythe, a senior vice president at Schwab Equity Ratings, which uses computer models to evaluate stocks.

Quantitative investing is not a panacea by any means. There clearly are situations and times where the underlying data simply do not capture the relevant information. However in a growing number of situations quant models are performing with aplomb. Remember this when you think about the basis of many discretionary methods – the interview.

“People’s overconfidence in their ability to read someone in a half-an-hour interview is quite astounding,” said Michael A. Bishop, an associate professor of philosophy at Northern Illinois University who studies the social implications of these models.

Just keep this quote in mind when you hear a portfolio manager on CNBC brag about how many CEOs they met with over the past year.

This content, which contains security-related opinions and/or information, is provided for informational purposes only and should not be relied upon in any manner as professional advice, or an endorsement of any practices, products or services. There can be no guarantees or assurances that the views expressed here will be applicable for any particular facts or circumstances, and should not be relied upon in any manner. You should consult your own advisers as to legal, business, tax, and other related matters concerning any investment.

The commentary in this “post” (including any related blog, podcasts, videos, and social media) reflects the personal opinions, viewpoints, and analyses of the Ritholtz Wealth Management employees providing such comments, and should not be regarded the views of Ritholtz Wealth Management LLC. or its respective affiliates or as a description of advisory services provided by Ritholtz Wealth Management or performance returns of any Ritholtz Wealth Management Investments client.

References to any securities or digital assets, or performance data, are for illustrative purposes only and do not constitute an investment recommendation or offer to provide investment advisory services. Charts and graphs provided within are for informational purposes solely and should not be relied upon when making any investment decision. Past performance is not indicative of future results. The content speaks only as of the date indicated. Any projections, estimates, forecasts, targets, prospects, and/or opinions expressed in these materials are subject to change without notice and may differ or be contrary to opinions expressed by others.

Please see disclosures here.

Please see the Terms & Conditions page for a full disclaimer.