Active management has come under increased scrutiny in recent years due to an alarming rate of such managers failing to outperform their benchmarks.
“The passive approach to ETF investing is increasingly popular with investors that struggle to find active managers that consistently outperform their peers and/or a common benchmark,” notes S&P Capital IQ.
However, there are asset classes where active management is working, including popular, income-generating master limited partnerships (MLPs). The fast-growing First Trust North American Energy Infrastructure Fund (NYSEArca: EMLP) confirms the utility of active management with MLPs.
“The ETF’s performance was driven by an actively managed strategy that cherry-picks more attractive energy infrastructure stocks. Fund managers look for midstream, pipeline-type MLP businesses whose cash flow depends on the quantity of oil transported rather than its price,” reports Aparna Narayanan for Investor’s Business Daily.
Last year’s top-performing energy sector ETF, EMLP has advantages that extend beyond active management. Advisors and investors have embraced the ETF in part because it caps its exposure to MLPs, which allows the fund to deliver more conventional ETF tax treatment than those MLP funds with C-corporation structures.
Hybrid MLP ETFs, or non-C-corporation MLP ETFs, have reduced direct MLP holdings to under 25% to meet regulatory rules and hold other energy infrastructure stock through subsidiaries as a way to avoid double taxation. [MLP ETF Education]