'Actively Managed' ETFs: Same Destination, Different Road?

by: Bruce C. Greig, CFA, CAIA, CMT

Depending on how you define “active”, there are in excess of 30 such ETFs currently on the market covering all aspects of the markets from equities (PDP, CRO, XRO, PMA) to bonds (MUNI, PLK) to currencies (NYSEARCA:CEW), among others. However, just because these offerings are said to be “active” does not necessarily mean you are getting something different than the more typical vanilla ETFs (such as SPY, AGG, MDY and so on). In fact, the correlation between these ETFs (or the underlying index) and the S&P 500 (in the case of the equity funds) is often in excess of .75. There is nothing inherently wrong with this, as there may be value-added in the performance side of the equation. However, many of these ETFs have a very short track record, so it is difficult to determine whether or not this is the case.

My concern with these ETFs comes from the second part of my article’s title. I’ve touched on the “Same Destination”, in the sense that the performance of many of these ETFs may mirror passive index funds (with decidedly higher expense ratios), and the “Different Road” refers to the “active” component that these funds purport to utilize. While all of these ETFs do incorporate some quantifiable system to select their holdings, this should not be confused with true “active” investment management. Looking at the underlying indexes, many of these ETFs trade infrequently, some only on a quarterly basis. While that is a step above “passive”, I would argue that it is not truly “active” either.

The debate between active and passive investment management is as old as the industry, and will no doubt continue to rage long after I am gone, but it is important for investors to know what they are buying into. The above mentioned ETFs may very well serve a purpose in many investor portfolios given their unique circumstances and risk preferences, but it is vital for users of these products to understand that “active” does not necessarily equate to “non-correlation”, nor “market-beating”. In any given time-period, these funds may, or may not achieve these results. In terms of “non-correlation”, there are many ETFs that do invest in alternative assets which have historically exhibited a low correlation to the bond and equity markets. Examples include CEW, CPI, and ALT-OLD. These ETFs are generally considered “alternative” since they invest in futures, commodities and currencies, and should not be confused with the “active” ETFs mentioned above.

Disclosure: None