Is There A Place For Active ETFs?

October 29, 2014

For example, some ETF managers forgo index tracking in favour of their own investment decisions. Does this then make the ETF active? Most probably, so the next question is whether they [ETF managers] are worth paying for?

One of’s Learn articles says that there will always be investors and fund managers who want to beat the market, and they’ll turn to active management to do it. In fact, mutual funds were originally started by fund managers who picked stocks to outperform the market and, to this day, most mutual funds are still actively managed.

Active ETFs forgo index tracking so that fund managers can attempt to outperform their targeted market by selecting the “best” securities.

Another more salient point about active ETFs, that has already been mentioned is the required transparency that accompanies the “exchange-traded” wrapper of ETFs. ETP issuers must disclose their creation and redemption basket of securities at the beginning of each trading day, but many active managers like to keep their trading ideas and their portfolio secret. They don’t want to publicly disclose their “secret sauce” strategy.

It is no surprise then that many would-be active ETF managers have avoided this space so far.

The first (and only) actively managed ETF (with exposure to equities) to be listed on the London Stock Exchange is - arguably - the db X-trackers SCM Multi Asset UCITS ETF (XS7M), which was launched in 2012. In its first year it returned 7.85 percent, but then you have got star manager - Alan Miller - behind it.

The lack of actively equity managed ETFs in the U.S. is a similar story, where active equity ETFs haven’t quite caught on, and the only truly successful actively managed ETPs are- again, in the fixed-income space.

According to Spencer Bogart, analyst at, it remains to be seen if actively managed ETFs will catch on and comprise a bigger slice of the total assets held in ETFs. There’s certainly a lot of buzz about active ETF filings, at least in the U.S., as more mutual fund managers decide to file for ETP versions of their funds.

Still, active ETFs have an uphill battle ahead of them. Transparency issues aside, many studies—such as these from the Financial Analysts Journal,Standard & Poor's, and Vanguard—have shown that after accounting for fees most active mutual funds underperformed their benchmark indices. Also, actively managed products can be a burden for investors trying to plan their portfolios: Exposure in an actively managed ETF can change completely at the whim of its manager.




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