MoneyWeek readers will know that we are big fans of exchange-traded funds (ETFs) – shares that track the fortunes of a sector, country or commodity without the higher charges associated with an active fund, such as a unit trust.
Now, however, a number of ETF providers are lining up a new variant: the active ETF. The competition to launch the first one in the US is hotting up, with State Street planning nine new funds, Powershares four and Bear Sterns just one, for now. So, should investors be getting excited?
No. First off, other than their novelty value, “it’s not clear how different they will be from the competition”, as Morningstar puts it. For example, two of the new ETFs from Powershares (the AlphaQ and Active Alpha Multi Cap) will be “quant” funds, using a computer program to select stocks based on a ranking system, with active trading limited, says Heather Bell on Yahoo Finance, to just three deals a week. The aim of both will be to outperform the Nasdaq 100 and S&P 500 respectively; a worthy objective, but hardly a new one.
A number of ETFs already do that, as, for that matter, do huge numbers of traditional active funds – often no more than trackers with a couple of extra positions tacked on. Combine that with the likelihood that active ETF charges are unlikely to be much lower than those of other managed funds and it really is hard to see the point.
So if you want a cheap tracker, stick with ordinary ETFs. And if you want an active fund, go for either a traditional managed fund (preferably an investment trust), or a listed hedge fund with a decent pedigree (see our fund investing pages for suggestions or read: Hedge funds are no longer the preserve of the rich)