Which Should Be Your Top Pick, Separately Managed Accounts or ETFs?

Abstract

This paper examined a large sample of equity SMAs (separately managed accounts, hereafter) from 1999 to 2023. This paper found that separate accounts have much higher expenses than ETFs and may outperform or underperform ETFs in terms of gross return and net return depending on their investment styles. However, this paper found that separate accounts consistently outperform ETFs in terms of risk-adjusted gross and net return alphas across different investment styles using the Fama and French Three Factor Model. Additionally, this paper found no significant evidence that tax is proactively managed within separate accounts. Lastly, this paper found that on average SMAs’ risk-adjusted alphas do not persist over time.