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 (NYSE: BSC) has won the race to bring the first such fund to the market, and soon investors of all stripes will be able to get in on the action.
First of its kind
On March 18, shares of the Bear Stearns Current Yield Fund (AMEX: YYY) will become available. This fund invests in an array of short-term, fixed-income instruments, including government and municipal bonds, corporate bonds, and securitized debt. Management's aim is to generate returns above that of your typical money market fund. According to Bear Stearns, the portfolio management team will attempt to add value through sector allocation, security selection, yield curve positioning, and duration management. The fund will fully disclose its holdings each day on the Bear Stearns website.
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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