Seeing Through the Fanfare of Actively Managed Funds

Mar.27.08 | About: SPDR DB (WIP)

Since I am at an ETF conference I thought I might put up a post about ETFs.

I perceive a slowdown in the flow of new ETFs and I think a slowdown is a good thing. I think the market long ago tired of different mixes of the same cap and style indexes. The revenue shares were the most recent and hopefully fund companies will focus on more innovation from here.

Many think that actively managed ETFs will be a big deal and, while I suppose that could be the case, I think the fanfare will be much bigger than the utility. The trouble with actively managed funds, well there are a couple, but in this context the first one is that ETF buyers often like the idea of knowing what they own and knowing what the fund will look like in the future. (The turnover in most indexes is quite low).

Knowing what a fund will hold three months from now allows for a portfolio to be constructed that looks forward. With an actively managed fund you do not know what it will look like in three months. This makes building a portfolio with active funds very difficult to do. Obviously poor management or a cold streak becomes another possible issue.

My hope is that we will see fewer new listings, but that the ones that actually come - there are many funds that have been filed ages ago that I don't think will ever actually list - will deliver something that is really new and potentially very useful for paving the way to better portfolio construction.

One example of this would be the recent SPDR Global Inflation ETF (NYSEARCA:WIP) which I wrote about for TSCM here. WIP provides access to something that really is different. Perhaps there is some future for solar ETFs or shipping ETFs but I think currency, foreign fixed income and absolute return ideas could be very useful, along with some really outside-the-box stuff like the filed-for but not-yet-listed carbon credit ETF/ETN. (That one could be a lousy investment for all I know, but learning about the carbon credit market and taken as an example for outside-the-box, it is worthwhile).

Progress in this direction will be slow as funds, regardless of the wrapper, need to be at least break-even and, hopefully, profitable. Having more assets makes or breaks funds, so the gamble a company takes is not insignificant, though we can hope.

The thing that I am trying to do is learn as much as possible about products that deliver some of the attributes sought from currency, foreign fixed income and absolute return, regardless of the product wrapper.