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

ETF, exchange traded fund
+ Zoom

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.”

0
Comments

What do you think?

View comments

Recommended for you

Featured video

Events

Pershing's Dolly: 3 challenges facing advisers ahead

What are the biggest challenges facing financial advisers today? Pershing Lisa Dolly explains some of the hurdles, and how great advisers are overcoming them.

Video Spotlight

Will It Last As Long As Your Clients Do?

Sponsored by Prudential

Video Spotlight

The Catalyst

Sponsored by Pershing

Latest news & opinion

Voya's win in 401(k) fee suit involving Financial Engines bodes well for other record keepers

Fidelity, Aon Hewitt and Xerox HR Solutions are currently defending against similar fiduciary-breach claims.

Collective investment trusts getting more attention from 401(k) advisers

The funds are catching on due largely to lower costs and more product availability, but come with some inherent drawbacks.

Vanguard rides robo-advice wave to $65B in assets

Personal Advisor Services, four times the size of its closest competitor, combines digital and human touch.

CFPs, including brokers, may have to adhere to a stricter fiduciary duty

CFP Board revises its standards and aims to beef up fiduciary requirements of certificants.

CFP Board's proposal to expand fiduciary duty draws praise, carries risks

Some question whether brokers will drop the CFP mark or if the CFP Board will strictly enforce its new standard.

X

Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print