Bill Gross can outperform, that would be a reason to consider these kinds of funds,” says Tim Mrock, chief operating offi cer of money manager CitrinGroup in Birmingham, Mich. Critics point out
that Gross has had the wind at his back as billions poured into the fund. He was able to scale up quickly and take large positions. The bond market
is huge, but Gross is about as big a player as you’ll fi nd there.
ACTIVE RISKS Still, even Gross
that actively managed ETFs must be better performers than passive or actively managed funds alone. After all, you get the management part, but in many cases at a cheaper price.
Swedroe, director of research at Buckingham Asset Management and the author of 12 books on passive investing, including The Quest for Alpha: The Holy Grail of Investing. “Capitalism is
PASSIVE
PASSIVE VS ACTIVE ETFS ACTIVE
Passive exchange-traded funds
are the original type of ETF. They track an index instead of relying on the expertise of a money manager to buy and sell holdings. Pros: Lower costs (as low as 0.02 percent), lower risk, better for less experienced investors Cons: No chance to outperform the market.
would be cautious of claiming victory over the market. In the end, he has to face up to the risks inherent in active trading and must account for losses if trading moves against him. Famously, Gross held very public
positions against U.S. Treasury debt in early 2011 and then took it on the chin as yields fell. Being able to zig when markets
zag is the ultimate test of a manager’s skills, yet almost none have the staying power to win for decades on end. Research shows that even the most adroit among them eventually see their strategy fall out of favor. Often, they give back all of the gains and then some.
FALLING BACK TO EARTH Performance soon retrenches.
Investors fl ee, but often too late to save their own skins. “As your portfolio appreciates, are you trying to ride your winners or take some off the table?” Mrock explains. “That’s going to be more important than anything an active manager is going to do for you. People just want to keep riding it higher and higher, and they eventually lose.” The risk for conservative investors is being lulled into the supposition
Active ETFs are a newer type of fund that is growing in popularity. In an actively managed fund, the money manager uses his or her trading skills in an attempt to maximize returns. Pros: Potentially higher returns Cons: Higher costs (often 1 percent or higher) and more risk.
great for delivering products people want. But Wall Street is great at creating products and then creating demand for them with their marketing,” Swedroe says. “Nobody needs a product that levers up like this. These are products created
It’s important, however, to keep
your head on straight about what you buy and why you buy it, says Brenda Wenning of Wenning Investments in Newton, Mass. As a manager, she seeks passive
ETFs over active ones, in part because so few active ETFs have track records to back up performance claims. “What I’ve seen is that they’re
pretty costly compared to the passive ETFs. I’d rather own the index itself than a fund where the manager is constantly changing. If you don’t know their algorithm or why they are going short, it can impair your own portfolio,” Wenning tells Newsmax. Active ETF fees are higher than
you might expect. Truly passive index ETFs trade for as low as 0.02 percent. “There are active ETFs that have expense ratios that are 1 percent or higher. In that regard, I would look for a mutual fund with similar strategy but a longer track record,” Wenning says.
STEER CLEAR OF LEVERAGE Even more dangerous are
“leveraged” ETFs, which use derivatives, futures, and other tools in an attempt to double or triple an index return. Steer clear, says Larry
to make the issuers money.” The true role of an ETF in your
portfolio is to gain exposure to the market in a way that minimizes taxes, Swedroe says. “ETFs don’t force you to realize gains the way mutual funds do. Gains are not distributed to you. ETFs have a way to distribute the stock back to approved traders.” Since the funds are on autopilot,
with no front offi ce, no customer service department, no bean counters to employ, they can be very effi cient, returning much more to investors.
PASSIVITY WINS “Active strategies have almost no
way to win after taxes. The odds of winning are astronomically low,” Swedroe says. “Indexing does not get ‘average’ returns. It gets market returns, minus very low trading and tax costs.” Active investors most often get the
same aggregate return over the long haul as their passive counterparts, Swedroe says, since the sum of the market equals its parts. If the market goes down, active managers also lose, but their customers also get hit with high expenses. “With a passive approach, you’re guaranteed to outperform the active investors.”
MARCH 2013 | NEWSMAX MAXLIFE 73
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