Debates over the use of exchange traded funds (ETFs) in portfolios generally are focused on active versus passive and overlook their ability to be an asset allocation tool.

Analysis of the active/passive debate is plentiful, but most of the debaters are firmly on the side of the latter.

A recent study done by Cass Business School concluded that about 2% of all actively traded funds outperform their benchmark.  Additionally, over the last 10 years there have been some interesting results about which funds failed to outperform their benchmarks, states James Smith of City Wire:

• 59% of large-cap blended funds in the United States failed;
• 71% of large-cap value funds;
• 34% of large-cap growth vehicles;
• 73% of small-cap blended funds;
• 64% of growth managers;
• 65% of value managers;
• 75% of short-term high yield vehicles;
• 100% of actively traded bond portfolios, focused on medium-term corporate paper and long-term government debt.

Some providers already claim that they will start providing traditional active mutual funds and active ETFs as soon as they make economic sense, in essence become profit-neutral, states Tony Baker, managing director of index and exchange traded products at NYSE Euronext.

Some believe that the effects of the credit crunch, market meltdown and global economic crisis are the reasons that many managers have been unable to beat their benchmarks.  It has been a crazy, unpredictable year, and the aforementioned have significantly impacted returns.

Tags: Large-Cap, Small-Cap