Can Active Management Overcome These Two Hurdles?

Getting active—in terms of health benefits, this is always a good thing and doesn’t require much selling, but when it comes to active ETFs, it’s a different story. As the active versus passive management debate persists, the former is facing two hurdles it needs to overcome—beating the market and remaining un-confidential.

With new active product offerings that retain the tradability factor of ETFs, but without disclosing holdings vis-à-vis mutual funds, will these funds attract the interest of investors? More importantly, their capital?

“The ETF is always going to be the superior wrapper, whether it’s nontransparent active or anything else, because you get the tradability, you get the tax advantages of it, and in an active strategy, … just the tax advantages being in the ETF structure make it worth doing if you believe your active strategy’s actually going to outperform and raise money,” said Dave Nadig, chief investment officer of ETF Trends, during an episode of CNBC’s “ETF Edge”.

On the flip side, there are some concerns to note—will the confidentiality of holdings induce a healthy dose of skepticism?

“The nontransparent thing … is in response to active managers still thinking it’s the 1990s and that someone’s going to find out what they’re buying and front-run them. That literally does not happen,” added Nadig. “There are no celebrity stock market managers who other people are trying to front-run. So, I’m not sure what this is solving or why this would matter,” said Ritholtz Wealth Management CEO Josh Brown. “The bigger issue that these funds face and why I’m skeptical that you’ll see a lot of big successes [is]they’re not systematic. And that is what intermediaries like myself, financial advisors, want more and more every year. We want to be able to explain things to clients — how a fund is built, what it will do, what it won’t do — and this is literally a countermove in the opposite direction.”

In the end, it’s a dog eat dog world in the ETF space and this, ultimately, will decide the fate of active managers.

“At some point, all the bad active managers get flushed out of the system, and there are still some active managers that add value,” Nadig said.

“Look at the people heading to Wall Street. They are armed to the teeth with data, with equipment, with wisdom, and there are more of them, and they have even higher degrees of learning, and they’re just better competitors,” said Brown. “It’s not that active managers suck all of a sudden. It’s the opposite. There are too many very talented people all fighting for the same scraps of alpha that are no longer easily harvestable.”

For more market trends, visit ETF Trends.