The newest kid on the block, the actively managed exchange-traded fund, claims to offer the best of both worlds – exchange-traded funds (ETFs) and traditional mutual funds. Sound great, doesn't it – put your money with an expert manager and still get low fees.
But is the actively managed ETF better?
It's still early days, but these the new kids present a real challenge to the traditional mutual funds.
ETFs are essentially funds that trade like a regular stock, and until recently have been “passive” – following the fortunes of the exchanges on which they are based, without human intervention.
The new actively managed ETFs will allow managers to change a limited number of positions a week, yet retain the advantages ETFs hold over mutual funds: much lower fees, trading during market hours, transparency of holdings, and tax efficiency.
I say “claims,” because it is really too early to tell. As the first active ETFs weren't available until March, 2008, there are still very few of them and they are still too new to say what kind of investment option they will turn out to be.
Despite the buzz, the actively traded ETF is still rare. According to Morningstar Inc., there are 848 passive ETFS in the United States and more than 100 in Canada. However, there are just over a dozen actively traded ETFs on offer in all of North America, with only a handful of them in Canada. At this point, a tiny fraction of the hundreds of billions of dollars invested in ETFs has been invested in actively managed ETFs.
Ironically, one of the reasons ETFs have become so popular is that investors are looking for alternatives to managed mutual funds that have performed so poorly over the past couple of years, whatever the reputations of their managers.
At least one bank is buying into the idea that active management can be a plus by investing in the one Canadian company offering exclusively actively managed ETFs.
With the exception of a fund from Claymore Investments Inc., the Canadian funds are offered by AlphaPro Management Inc., a subsidiary of BetaPro Management Inc.
Earlier this month, National Bank Financial Group acquired 20 per cent of AlphaPro. Banks, of course, drove the success of mutual funds in Canada, and while the National Bank sale is just a toe in the water, the sale augurs well for the future of the actively managed ETF.
The two new AlphaPro funds feature high-profile, seasoned managers. The first actively managed ETF launched in Canada this past January was Horizons AlphaPro Managed S&P/TSX 60 ETF HAX-T . The aim is to achieve long-term capital growth by investing primarily in equities traded on the S&P/TSX 60. Investment analyst Ron Meisels (who also writes for the Globe and Mail each Saturday) is providing the management guidance for the fund. Mr. Meisels, based in Montreal, is a veteran technical analyst, famous for his 1995 prediction that the Dow would crack 10,000 in 2000. At the time he made his prediction, it was at 3,850. An industry survey ranked him among the Top 3 technical analysts for six consecutive years.
Another AlphaPro fund, Horizons AlphaPro Gartman Fund HAG.UN-T , provides investors with the opportunity to benefit from the strategies offered by Dennis Gartman and his respected daily newsletter, using equity securities, futures contracts and ETFs to provide long and short exposure to multiple asset classes. You may recognize Mr. Gartman; he is currently famous for dumping on Warren Buffett's investment strategy, calling the 45-per-cent loss in value of Mr. Buffet's Berkshire Hathaway BRK.A-N stock “inexcusable.” Mr. Gartman has been writing the daily Gartman Letter since 1986, and has publicly and volubly disagreed with the buy-and-hold diversified funds philosophy of mutual fund pioneers, such as John Vogel.
