In the months leading up to the launch of the first actively managed ETFs a few years ago, ETF industry commentators were generally divided into two camps. On one side were those who believed that actively managed ETFs would be a game-changer, while on the other were those who suggested that these funds would ultimately fail to attract significant assets and die on the vine.
In hindsight, both forecasts have proven to be too extreme, as the successes and failures of actively managed ETFs have been more nuanced. And yet, the short history of actively managed ETFs provides valuable information about what the future might hold for this category of funds.
One complication in determining just how successful actively managed ETFs have been so far is the fact that there is a gray area between active and passive approaches. For example, an ETF is generally considered passive when it tracks an index; however, many indexes now follow rules that seek to deliver better risk-adjusted returns (or alpha) than traditional benchmark indexes. Should these ETFs be classified as active since they seek alpha, or should they be classified as passive since they follow an index?
In either case, many of these funds have gained a significant following over the past several years, especially for investors and financial advisors who still believe in active management, but are drawn to the tax efficiency, transparency, potential cost savings and intraday liquidity of ETFs versus traditional mutual funds.
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By the same token, there are those exchange-traded products (ETPs) that are technically actively managed since they don’t track indexes, but whose objectives are to simply deliver market returns. Many of the largest currency ETPs fit into this category as they seek to deliver returns that are reflective of the change between two currencies, not to improve upon those returns. While many investors are likely unaware that these ETPs are considered active, to the extent that returns are in line with their objectives, and investors have an efficient vehicle with which to either speculate on the direction of various foreign currencies or to hedge currency risk, this distinction is essentially irrelevant. Generally speaking, the success in asset gathering, as well as the utility of this group of ETPs, has developed irrespective of its active or passive classification and will likely continue as such.