[This article appears in our August 2017 issue of ETF Report.]
According to Don Schreiber Jr., passive ETFs are weapons of mass destruction.
"Passive [investing] is probably one of the most dangerous things I've seen in my 35-year career," said the founder, CEO and co-portfolio manager of the $1.8 billion WBI Investments.
That, in large part, stems from transparency. Knowing an ETF's full basket of securities gives investors a false sense of security, says Schreiber, and encourages herd mentality.
"[Passive] is a crowded, one-sided trade into products that ride the roller coaster up and down," he said. "It crushes people's ability to retire comfortably."
That's one reason why he and many other product issuers have jumped on the actively managed ETF bandwagon (WBI Shares now offers 12 active ETFs cumulatively worth $1 billion). Active ETFs promise all the tax efficiency and trading flexibility of an ETF, backed by the expertise and discretion of an active manager.
Just one problem: Most investors don't seem to want them.
‘Active Is Not Dead’
Today 191 actively managed ETFs are on the market, but they've struggled to gain significant market share. Together these funds have amassed $36.9 billion—barely one 1% of the $3 trillion ETF market.
That's not to say active ETFs haven't carved out a niche. Particularly in the fixed-income space, heavyweights like PIMCO's $7.1 billion Enhanced Short Maturity Active ETF (MINT) and the $3.4 billion SPDR DoubleLine Total Return Tactical ETF (TOTL) have attracted plenty of investors.
But with few exceptions, active ETFs have languished in the equity space and beyond.
Still, it's too early to discount active ETFs, cautions Bill Donahue, managing director of PricewaterhouseCooper's ETF practice. "I would not suggest active is dead."
Some money managers even prefer them.