Written Saturday afternoon at the Vancouver Airport.There was a Barron's article about what they expect to be a proliferation of actively managed ETFs. The article stresses the idea that ETF is just a wrapper and that active management can lend itself to the wrapper.
I will not be a fan of these but for a different reason than most other people who end up not liking them. For now and for a while to come the actively managed equity ETFs will be broad based like large cap growth or whatever. The issue with a broad based actively managed fund, regardless of the wrapper is that you don't know what it will do in the future. Today such a fund could be underweight a sector but then be overweight in the future; overweight enough to mean something should be changed elsewhere in the portfolio or the actively managed ETF in question should be sold.
A big positive of ETFs is that you know what it owns now and you have a very good idea what it will own six months from now. This means a portfolio can be constructed to express various opinions that hopefully result from some diligent research. Where active management could be useful with ETFs would be some sort of specialization. If a fund is going to actively manage utility stocks well then it will always be a proxy for utilities. It might be managed well, or not but it will be a proxy for utilities today and a proxy for utilities six months from now.
Ditto for any country fund like if a closed end country fund switched to being an ETF.
My preference is for the ETFs to be somewhat static indexes. I'm not sure who dubbed it this way but the idea of making active decisions with passive products strikes me as a good way to go. You know what you own and they can be easily blended with other holdings.
9 comments:
Greetings Roger,
You are absolutely spot on with this one. How will the industry differentiate the active managed ETFs? Will they call them micro-mutual funds?
Style drift has alway been a problem in the mutual fund business. Of course, it is only a problem when things go wrong. When a fund is on a tear, style drift is unimportant.
I think the only way for an investor to know what he is getting into is to read the prospectus before the purchase is made to make sure it fits his plan. Unfortunately, I suspect active ETFs in general will be just another way for marketing firms all along the food chain to extract fees from unknowing "investors."
Actively managed ETF's are unlikely to work.
Any active manager with a good track record is not going to be happy earning paltry ETF fees.
Mutual funds as a grouping have always had a critical problem -- they underperform in down markets, just when diversification is needed most.
ETF's don't underperform in down markets and their consistent construction gives them a 'pure 1.0 beta'.
Mutual funds outperform in up markets because they generally keep their beta above 1.0 versus the benchmark. This isn't alpha, its just leveraged beta.
Perhaps some innovation can occur --- but re-packaging mutual funds in ETF wrapper is a particularly lame idea, imo.
Anon 8:31
Well said.
Completely agree with ETFs as a generally static portfolio choice.
When I invest into an ETF, I seek certainty and simplicity to diversify my portfolios. I am not looking for another layer of professional (sic) management to potentially screw it up, changing the focus and mix so as not to resemble what I originally purchased.
I am at a point where I mentally screen out all ETFs that attempt to be too clever, using fuzzy tactics to sell product - similar to shopping a corner used car lot on what used to be a gas station, being hounded by a fat guy smelling from cigs dressed in a loud, dated suit.
"Do I have a deal for you".
T
i am glad to see greece was bailed out, now we can continue the rise in the markets. who know, dow 36,000 may be closer then we think
Roger,
I don't recall seeing you discuss your views regarding passive ETF's versus passive OEF's (open-end mutual funds), otherwise known as Index Funds. I see you write about ETF's all the time, but rarefly (if ever) anything about Index Funds. Any reason for preferring ETF's over Index Funds? Why do ETF's seem to be growing so much faster than Index Funds (or is that just my perception)?
- aagold
index OEFs would seem to offer the same access with less flexibility.
Roger, this is a critique (which I share to some degree) of all managed products, not just ETFs—unless I"m missing something?
I do like managed funds for bonds, and for less-transparent markets (e.g. Asia) where expertise must be more specialized. But I'd rather have funds I can trade on short notice, rather than OEFs with their end-of-day orders and other restrictions.
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