As Carol Anne in the Poltergeist movie would say, "They're here."
We've known they were coming, and next week, the very first actively managed exchange-traded fund will begin trading. Bear Stearns
First of its kind
On March 18, shares of the Bear Stearns Current Yield Fund
Is it a smart buy?
Although this particular fund in general looks quite reasonable, I'm hesitant to jump on the actively managed ETF bandwagon. It's true that these funds can offer several advantages over traditional mutual funds, including lower expenses and greater tax efficiency. But I'm willing to bet that as the universe of actively managed ETFs expands, these two benefits will tend to shrink in comparison.
And if not for lower costs or tax benefits, why would investors choose an actively managed ETF over a regular mutual fund? Mutual funds, for the most part, are designed to be long-term investments. This lines up well with the long-term focus that most investors need to succeed in this game. My fear is that investors will jump into actively managed ETFs and engage in frequent trading, attempting to take advantage of intraday market movements. This would be nothing other than a distraction from their long-range investment goals.
Lastly, given that more than half of traditional mutual funds don't even measure up to their benchmarks, it's probably safe to assume that in a few years, the same percentage of actively managed ETFs won't either. Relying on a manager's skill to outwit the market means that some funds will be able to beat those benchmarks, but just as many won't. Changing the packaging doesn't mean that the underlying product is any different.
So while the market may receive the first actively managed ETFs with excitement, keep a close and skeptical eye on them. After all, an informed investor is a prepared investor.
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