Actively managed exchange traded funds (ETFs) have been the subject of many recent debates, but if they play their cards right, could they make a real dent in the mutual fund business?

The actively managed ETF, launched a year ago, were touted as a serious challenger to the dominance of mutual funds. Actively managed ETFs have far superior transparency, while attempting to do the same thing a fund manager does: stock-picking and trying to beat the performance of a given index.

Janet Paskin for SmartMoney says that the mutual fund industry’s traditional wisdom – that investors were better off paying higher fees for the expertise of an experienced stock picker – has been challenged. The mutual fund industry has been slow to respond in kind, scared off by daily transparency. But we’re seeing some signs of that changing, and now more than ever is the time for more openness. Investors are craving it.

Since the first truly actively managed ETFs have launched, there have been both setbacks and advancements along the way. Here are a few:

  • The first actively managed ETF was the Bear Stearns Current Yield, which closed less than a year after it lauched. PowerShares soon followed with its own line of funds.
  • Disclosure concerns have popped up as Grail Advisors and American Beacon have geared up to launch two truly active ETFs this spring. They’ll report their holdings at the end of the day, every day, in response to the disclosure dilemma.
  • Many fund providers worry that if they reveal what they are buying, copycat investors will “front-run” them by getting into the stock before or ahead of them, either to up the investing strategy or to drive up the price.
  • For retail investors, front-running would be a challenge, anyway. Trading costs and tax consequences might actually make it more expensive than just buying the mutual fund, or a potentially cheaper ETF.
  • Bradley Kay, an ETF analyst with Morningstar, says most managers don’t have real cause to be concerned with front-running, and transparency is just a good idea. We’re in a market where investors want to know more, not less.

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.

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