Yield of Dreams

Active’s a Zero Sum Game… For ETFs Too?

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Active ETFs have been making a big splash lately, especially with the recent launch of PIMCO’s Total Return ETF (ticker: BOND). But a new report by Lipper finds that active ETFs are more expensive than index funds, but so far haven’t outperformed pure index ETFs over the long term.

That’s typically the argument for actively managed mutual funds—you’re paying more for them, but they make up for it in higher performance. Of course, that point is also arguable. Studies show that actively managed funds typically underperform their passively-managed brethren.

But does the new Lipper report indicate that active’s a zero sum game for ETFs too?

It’s no surprise that actively managed ETFs are more expensive than pure index ETFs. According to Lipper, median total expenses for active equity ETFs is 88.9 basis points, compared to 52.5 basis points for pure index ETFs.

But active ETFs have underperformed these index funds in all of the annualized periods, except for the one-year period. For example, for the last three years, index funds were up about 23 percent, versus about 6 percent for active ETFs. 

So what are investors paying for, if not performance? Lipper doesn’t draw any conclusions about whether active ETFs will outperform in the long run. But it does indicate that returns for active ETFs have been less volatile than those of ETFs that track an index. For example, median active ETF annual performance ranged from 1.31 percent to 10.83 percent for the last four years, compared to a range of -40.09 percent to 55.59 percent for pure index funds. Those are some huge swings.

Despite the higher fees, active ETFs might be a better bet for jittery clients who can’t hang with the market volatility.

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Casting a gimlet-eye on asset management issues.

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