Active Equity ETFs

Some ETP mangers forgo index tracking in favor of their own investment decisions: Are they worth your money?

Passive investing is the foundation from which ETPs have pervaded the investment world. However, 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 Strategies

As the name suggests, active ETPs forgo index tracking so that fund managers can attempt to outperform their targeted market by selecting the “best” securities.

In the ETP space, active management still has yet to really take off and gain momentum. There are several reasons for this. For one, many renowned and famous active managers currently run mutual funds and hedge funds, and charge high fees for their services. As such, these managers are understandably reluctant to migrate to lower-fee ETPs.

Perhaps more salient, however, is the required transparency that accompanies the “exchange-traded” wrapper of ETPs. ETP issuers must disclose their creation and redemption basket of securities at the beginning of each trading day (for more information, see “Creation Baskets vs. Holdings”).

Many active managers like to keep their trading ideas and their portfolio secret, and don’t want to publicly disclose their “secret sauce” strategy. While ETPs have been a force for transparency, traditional active management shuns an open book. As such, many would-be active ETP managers have avoided the space … so far.

In fact, there are currently no active equity ETPs listed on the LSE, and only a handful of active ETPs overall, mostly in the fixed-income space.

The situation is much the same in the United States, where active equity ETPs haven’t quite caught on, and the only truly successful actively managed ETPs are- again, in the fixed-income space.

In short, it’s slim pickings as far as actively managed ETPs go. Still, the industry is constantly evolving.

The Future Of Active ETPs

It remains to be seen if actively managed ETPs will catch on and comprise a bigger slice of the total assets held in ETPs. There’s certainly a lot of buzz about active ETP filings, at least in the US, as more mutual fund managers decide to file for ETP versions of their funds.

Still, active ETPs 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 ETP can change completely at the whim of its manager.

One way or another, it’s likely only a matter of time before the LSE gets an actively managed equity ETP listing—stay tuned.