Unavoidable: Death, Taxes; Avoidable: Actively Managed ETFs

This article was written with Steve Cordasco, of Cordasco financial network. It's part of a series of articles developed under an agreement with thestreet.com to work with a variety of contributors and assist them in delivering actionable investment ideas each week.

David Evanson and Steve Cordasco

TheStreet.com, Summer, 2012

NEW YORK (TheStreet) — Generally speaking, I donzzt like contradictions. They get under my skin.

Thatzzs why I get uncomfortable when financial professionals start prattling on about actively managed ETFs. “The best of both worlds” is a commonly cited advantage.

To my way of thinking, itzzs the worst of both worlds: That is, higher costs and, as far as I can tell, inferior performance.

I noted with some degree of sinister appreciation that the ETF Deathwatch maintained and published by Ron Rowland, president of Capital Cities Asset Management, contains 21 of the 42 actively managed ETFs.

The Deathwatch revolves primarily around trading volume. So the designation speaks mostly to popularity rather than success. Still, with names like Pimco getting into the actively managed ETF space with recent the launch of the Pimco Total Return ETF (BOND), I feel this is something that needs to be nipped in the bud.

Actively managed ETFs are, in most instances, a bad idea. Perhaps therezzs a case to be made when an actively managed ETF gives you access to some highly specialized expertise and provides a dramatic discount on the fees that would be required to acquire certain securities through individual trades.

That aside, I think Izzll stick with my original assertion.

First, they come with higher costs and generally higher portfolio turnover, and thatzzs always bad. I havenzzt done an exhaustive study but the actively managed ETFs I have looked at seem to deliver underperformance.

The other reason for my aversion to actively managed ETFs is their complexity. When I think about them, I often remember the commercial where the check-out clerk asks the customer if he wants a paper or plastic bag, causing total paralysis.

“So do you want active or passive ETFs…?”

In fact, provoking mental paralysis among investors would be among the better outcomes because it assumes an understanding of the differences between active and passive ETFs.

In truth, these differences are not so easy to understand, and they represent another example of conventional Wall Street offering customers overly complex products that ultimately cost them more.

There are a lot of things in life you simply canzzt avoid. Then there are the things you can absolutely avoid. Actively managed ETFs are among them.

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