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Money managers under the microscope
from Reuters Money:
Actively managed ETFs and other wrinkles
The following is an edited excerpt from Never Buy Another Stock Again: The Investing Portfolio that Will Preserve Your Wealth and Your Sanity, written by David Gaffen, who is the Reuters markets editor. It was printed with permission of FT Press, an imprint of Pearson.
One of the biggest growth industries in finance right now is in exchange-traded funds, and further growth in ETFs appears likely to come from several places.
Sector or country-specific ETFs and actively managed ETFs are likely to continue to be a growth area, along with perhaps a combination of the two (an actively managed ETF focusing on small-cap stocks, for instance).
The most popular sector ETFs are in natural resources and technology, although State Street, which sponsors the SPDRs ETF, has S&P sector ETFs for nine of the ten S&P sectors (telecommunications is the lone exception—it’s folded into another area); new ones continue to crop up.
For professional investors attempting to beat the market, they’re an ideal vehicle because they carry a relatively low cost and have tax efficiency, as David Kotok of Cumberland Advisors has pointed out. But John Bogle, in his book “The Little Book of Common-Sense Investing,” quoted (anonymously) a chief investment officer at an ETF company cautioning against “pin-pointed” bets on sectors, because they “still involve nearly as much risk as concentrated stock picks.” But that doesn’t mean they’re going to stop growing.
Like mutual funds, tech stocks, tech funds, and other hot investments that dominated the landscape for a time, the ETF world is turning into its own “app economy,” as Nicholas Colas, chief market strategist at BNY ConvergEx Group, puts it. This, by itself, is not necessarily a bad thing, but with more choices comes more confusion.
Another area where one can expect a growth spurt is in actively managed ETFs, first introduced by investor Harry Dent with his Dent Fund through AdvisorShares, which is now marketing other new actively managed exchange-traded funds. And so ETFs are starting to come full circle: While this is still designed for the same kind of tax efficiency and liquidity offered as most ETFs, now investors have the (supposed) benefit of active management—but the higher expenses to boot.
