The exchange traded funds industry is dominated by passively managed products, but active funds are on the rise and that could be a theme for advisors and investors to watch going forward.
Advisors are looking critically at traditional market indexes and the challenges of navigating today’s new market environment.
Further adding to interest for actively managed ETFs, innovative ETF structures that offer new portfolio methodologies have also attracted greater interest among stock-picking money managers whom are more wary of potential frontrunners if they were to offer a traditional passive ETF. More money managers are looking into the actively managed exchange traded fund space in a bid to expand their reach.
“The latest Morningstar Active/Passive Barometer, which was released in August, stated that “actively managed funds (including ETFs) have failed to survive and beat their benchmarks, especially over longer time horizons.” The study found that only 24% of all active funds topped the average of their passive rival over the 10-year period ended in June 2020,” reports Financial Advisor.
The exchange traded fund universe has quickly expanded on the increased popularity of passive, index-base strategies. The next growth spurt could come from the actively managed ETF side as more prominent mutual fund names begin to step into the space.
Actively managed exchange traded funds have been overshadowed by their passive index-based peers, but more investors are beginning to consider the strategies and benefits behind these active products.
Investors need to go beyond relying on past performance or buying the cheapest ETF. They are now incorporating a more forensic approach that could dig deeper into company fundamentals.
“What should advisors look for in an active ETF? A good place to start is by gauging a fund’s “active share,” which measures how much a portfolio’s holdings differ from its benchmark index. While this metric alone doesn’t necessarily indicate manager skill or guarantee excess performance over a fund’s benchmark, it could be a precursor of future outperformance,” according to Financial Advisor.
For more on active strategies, visit our Active ETFs Channel.
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.