Recently, I received an inquiry about the state of actively managed ETFs. Had my position on their viability changed since the beginning of the year?
Answer? Nope. The so-called actively managed vehicles are… for the most part… poorly conceived, low-volumeÂ losers.
I’m not aloneÂ in my beliefs either.Â None of the existing actively-managed ETFsÂ have sufficient assets under management. Some have already been killed off due to lack of interest.Â Others appear on Ron Rowlandâ€™s ETF DeathWatch.
In truth, actively managed ETFs provide few of the benefits that have made ETFs the investment vehicle of choice. In fact,Â while they have been trying to capitalizeÂ on aÂ surge in ETF popularity, they have failedÂ to capitalize on the benefits of traditional ETF investing.
What makes ETFs so fantastic? Trade-ability, Tax-efficiency, Transparency and Total Expense. (Note: I had to work hard to get another â€śTâ€ť in there for the low expense of passive indexing.)
In what ways do actively managed ETFs benefit investors? On trade-ability, actively managed ETFs lack sufficient volume. The bid-ask spread for funds like PowerShares Active Mega-Cap Fund (PMA) and Grail Large Value (GVT) is often as high asÂ 0.5 -0.75%; that canÂ add as much as 1.5% of extra expense in a round-trip trade.
On tax-efficiency, passively tracking an index means very little buying or selling, except when the index is changed. However, Actively Managed ETFs serve upÂ plenty of trading activityâ€¦ ergo, they’re not tax-efficient.
Okay, so theyâ€™re not tax-efficient anf they’re not very tradeable.Â Theyâ€™re at least transparent, right? Isnâ€™t that supposed to be the big difference between actively managed ETFs and Closed-End Funds?
There may be more transparency than a mutual fund that doesn’t open its books until 3 months after trades have been made. Yet where exactly is the open book on ever-changing,Â actively managed positions? Do you have to go to the fund managers’ web site each and every day to find out what’s happening?
The point of buying an exchange-traded index investment is soÂ that you don’t have to check it every 5 seconds.Â The transparency of an indexÂ means that you know exactly what that index is… and exactly what you’re getting into!
Finally, total expenseâ€¦ where itâ€™s not even close. Forget the hidden cost of bid ask spreads for a moment, and just go the expense ratio. All of the so-called actively managed ETFs cost more than the passively managed alternatives. You’re the one who has to pay for the supposed stock picking prowess. And yet, nothing in performance suggests an ability for risk-adjusted outperformance.
If youâ€™d like to learn more about ETF investingâ€¦Â then tune into â€śIn the Money With Gary Gordon.â€ť You can listen to the show â€śLIVEâ€ť,Â via podcast or on your iPod.
Disclosure Statement: ETF ExpertÂ is a web log (â€ťblogâ€ť) that makes the world of ETFs easier to understand. Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC. The company and/or its clients may hold positions in the ETFs, mutual funds and/or index funds mentioned above. The company does not receive compensation from any of the fund providers covered in this feature. Moreover, the commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities. Investors who are interested in money management services may visit the Pacific Park Financial, Inc.Â web site.