Exchange traded funds (ETFs) follow an index, and although there have been several filings with the SEC to launch actively managed ETFs, none have been approved yet. What is the difference between following an index and active management? Chuck Jaffe of MarketWatch explores the differences and the similarities. He explains active investors believe a manager can add value with better performance or protection during declines. Index investors buy the market rather than try to beat it.
So where is the similarity? As we recently saw with indexes such as the Russell 3000, there is an annual or semi-annual rebalancing. Indexes are meant to track a specific segment of the market, but some management is needed to make sure the index stays on track. If the rebalancing did not take place, then the index could stray from its purpose.
This "light" management is done to keep things in-line; it has rules and guidelines to follow without emotions. One could compare it to car maintenance; you want to keep the car running in top performance, so you have regularly scheduled service. The same is true with an index.
ETFs can also be actively managed in the sense that investors can buy and sell individual ETFs based on their investment discipline. We use ETFs to manage our client accounts by using a long-term trend line and percentage off the high to establish sell points for the ETFs.
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.