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Active Funds Set to Change ETF Landscape

Do we need actively managed ETFs

Active Funds Set to Change ETF Landscape

By Ron DeLegge, Editor - March 3, 2008


SAN DIEGO ( - The prospect of actively managed exchange-traded funds (ETFs) has created buzz that finally appears to be on its way towards fulfillment.


According to reports, the Securities and Exchange Commission has given permission to Wheaton, IL-based PowerShares Capital Management to offer active ETFs.


Up until now, all ETFs have been tied to a specific stock, bond, or commodity index.


The four new PowerShares funds slated for launch are:


--Active AlphaQ, benchmarked against the Nasdaq-100 index;

--Active Alpha Multi-Cap, benchmarked against the S&P 500 index;

--Active Mega-Cap, benchmarked against the Russell Top 200 index;

--Active Low-Duration, benchmarked against the Lehman Brothers 1-3 year U.S. Treasury index.


Fund ticker symbols and expense ratios have yet to be released. 


Depending on who you ask, the introduction of active ETFs is the next best thing since sliced bread, or possibly the worst.


Here’s a sample of the early reaction to the impact of active ETFs:


“It’s important to realize that these products do not have an existing track record so it will be interesting to see the extent of alpha they are able to achieve given the disclosure of the creation/redemption basket.”

- Rick Genoni, Head of ETF Product Development at the Vanguard Group


"Actively-managed ETFs could suffer from some of the weaknesses that afflict open-end mutual funds: consequential implicit costs, non-trivial market impact, excessive diversification, benchmark-hugging, and, of course, the risk of sustained underperformance."

-Kevin S. Price, Chief Investment Officer at Interlake Capital Management


“I think active ETFs will succeed and integrate into the investment landscape. For advisors and investors to become comfortable with active ETFs, transparency and liquidity will be instrumental.”

-Kevin Ireland, ALPS Fund Services


“"Actively managed ETFs have been around for many years. The problem was that fund providers were not allowed to call their products active management because the SEC mandated that all ETFs must follow an index. However, the regulators do not define what an index was. Consequently, active investment strategies were tweaked into 'strategy indexes' to satisfy the SEC requirement.”

-Richard Ferri, CFA, Author of “The ETF Book”


“I believe what's really driving this is the mutual fund industry's perfectly legitimate goal of attempting to reduce or eliminate the tax-disadvantage their products face, primarily by issuing ETF share classes of existing actively-managed mutual funds.”

-Michael Krause, President at AltaVista Independent Research


“I doubt actively managed ETFs will provide any capital gains relief compared to traditional funds. Fund managers may be able to offload low basis stock due to the redemption process, but the only way active ETFs will provide tax superiority is if the fund managers reduce turnover. So long as the average active fund turns over 80% of its portfolio each year, the investor will experience large capital gain bills.”

-Kirk Kinder, CFP at Picket Fence Financial


“The initial acceptance of actively managed ETFs will likely be subdued because they lack a historical performance track record which will take time to build.”

-Simon Maierhofer, Co-Founder of


“I do not see the appeal of actively-managed ETFs over mutual funds, other than perhaps the tax efficiency. In my mind actively-managed ETFs will only add to already muddy and confusing waters when it comes to the average investor understanding the differences between index funds, ETFs and mutual funds.”

-Katie B. Weigel, CFP at Longpoint Financial Planning

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