Assessing Allure of Active Management | ETF Trends

In arguably quiet fashion, active managers are performing admirably in 2023. An impressive percentage of active equity and fixed income funds beat their benchmarks in the first half of the year.

Skeptics might be apt to say that they’re always hearing the saying “it’s a stock pickers market,” but the environment could be shaping up in favor of active management, potentially providing some ballast for active equity exchange traded funds such as the Calvert US Select Equity ETF (NYSE Arca: CVSE).

Not only is CVSE actively managed, it also emphasizes environmental, social and governance (ESG) principles. This is a relevant combination because it could open CVSE to a broader audience and also because active management can help investors avoid some of the controversies associated ESG investing. Moreover, some equity market macro factors could highlight the advantages of active management going forward.

CVSE, Active Management Could Have Tailwinds

A variety of scenarios could be efficacious for CVSE and active managers at large. For example, it’s possible that equity market volatility will increase over the near-term. Active management isn’t guaranteed to blunt volatility, but it can mitigate it. Plus, active managers can more rapidly respond to valuation anomalies created by elevated market turbulence. Other factors, including equity market dispersion, could also bode well active managers.

“Our analysis of stock return dispersion across time has found average dispersion since 2020 to be more akin to the pre-GFC period than the 10+ years after it. We believe this normalization sets up an environment in which skilled stock picking can once again provide more meaningful contribution to portfolio outcomes,” according to BlackRock research.

Another advantage that could accrue to CVSE and active managers is that after a lengthy run of a small number of stocks leading the broader market higher, some experts believe market breadth is ready to expand. Active funds can more rapidly respond to that scenario than index-based strategies.

“Comparing the index’s market cap-weighted (16%) and equal-weighted (6%) returns at mid-year illustrates just how much the mega-cap stocks ― primarily tech-related shares across IT, telecom services and consumer discretionary ― have driven year-to-date index performance,” added BlackRock. “As the market increasingly acknowledges and values company fundamentals, we expect market breadth to widen beyond the current leaders and create greater opportunity for active stock pickers with the research capabilities to identify companies with strong fundamentals and attractive long-term growth prospects.”

Even if market breadth doesn’t expand and technology remains the primary driver of upside, CVSE can benefit because it allocates a third of its weight to that sector.

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