Inside ETFs Live Indexers scoff at 'actively managed ETF'

Critics say such funds contradict the whole idea of indexing

Feb 12, 2013 @ 2:43 pm

By Jason Kephart

Exchange-traded-fund cheerleading is in full force this week at the IndexUniverse Inside ETFs conference in Hollywood, Fla., but actively managed equity ETFs aren't receiving much fanfare.

“There's nothing in the ETF structure that solves the problem of actively managed mutual funds,” Matt Hougan, president of IndexUniverse, told conference attendees Monday morning. “The majority underperform, and it's impossible to pick the ones that will outperform.”

The Vanguard Group Inc.'s chairman emeritus and former chief executive Jack Brennan took it a step further later in the day, calling actively managed equity ETFs an oxymoron.

“I just don't get it,” he said during his keynote speech. “One of the reasons you index is to take manager risk out of the equation.”

Columbia Management Investment Advisers LLC is the only firm with actively managed equity ETFs in registration with the Securities and Exchange Commission, but it isn't the only company expected to launch active equity ETFs.

“There are two types of asset management firms. Those that have figured out they need to get into ETFs and those that haven't,” Ric Edelman, chief executive of Edelman Financial Group Inc., said during a panel discussion Tuesday morning.

“The fund industry knows they need to switch to the ETF platform because their platform is antiquated,” he said.

“It's inevitable American Funds will launch ETFs. They'll do it or they'll die,” Mr. Edelman said.

American Funds, the third-largest mutual fund company, hasn't made any moves toward ETFs yet, but its competitors have.

Fidelity Investments is widely thought to be readying a lineup of actively managed sector ETFs that are clones of its Fidelity Select Sector Funds. Other companies such as Eaton Vance Corp., Franklin Templeton Investments and T. Rowe Price Group Inc. have filed for permission to launch active ETFs.

In total, 34 companies that don't offer index ETFs are in various stages of seeking approval with the SEC to offer active ETFs.

Active ETFs did find a defender in the most unlikely place.

Active ETFs could help providers reach fee-only financial advisers, the biggest adopters of passively managed ETFs, Joel Dickson, senior investment strategist at Vanguard, the largest index fund provider, said in an interview.

“The only way we could reach fee-only advisers was through ETFs, because we don't pay to get on platforms” he said. “Fee-based has grown so prevalent, but the traditional commission-based distribution model doesn't fit into that.”

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