The actively-managed exchange traded fund (ETF) remains an illusion due to several regulatory constraints. Although an actively-manged ETF is yet to be seen, providers are getting as close to active management as they can by making indexes shaped by quantitative models. They use the same criteria as an active manager and likewise, these ETFs aim to outperform conventional benchmarks. Sonya Morris for Morningstar states that although using quantitative models to pick stocks is nothing new, the ETFs that track enhanced indexes use the same techniques to construct their indexes. Investment metrics include relative valuation, fundamental strength, technical and momentum factors.

The strength here is that the quantitative advantage enforces investment discipline with consistency. The weakness is that a model will slowly loose effectiveness because when the approach is working other funds will try to copy, taking away its advantage. If this is the case, who says too much of a good thing is bad?

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.