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Active Management ETFs
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About Active Management ETFs |
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Active Management ETFs: Overview and forecast
Active Management ETFs were going to be the Next Big Thing, in 2007. They, like the other ETFs, were hit by the index massacre in 2008. They were supposed to be reactive ETFs, playing the market, working like "mutual day traders". So if an index went up during the day, so would the Active Management ETFs.
That was a big departure from the original concept of the ETFs. Active Management ETFs were controversial, when they were first conceived. Some people said it was actually the exact opposite of the idea of following indices, which is more a matter of semantics than a definition.
As a matter of fact, the default position of anything which is index based will be something like that, particularly when major stocks receive big price moves. Only the trading element is different, in terms of Active Management ETFs.
In a sense, it's a somewhat cosmetic argument.
The historic train wreck on the Dow put an end to the concept, in theory, but not in practice. Active Management ETFs are up and running, and some, interestingly, are doing reasonably well, given the situation. They are down, on the 12 month returns basis, with one modest exception. What's more interesting is that even despite the credit crunch, they've been doing quite well, in terms of the 6 month returns. On a market which is still down by over 40%, only one of them is listed as down by more than 1%. That's not a bad performance.
Over the 3 month returns, three out of four are doing quite well, with returns from 8% to 15%. The other is down by 0.6%. That's an argument for the Active Management ETFs as better operators in short term moves. They're still below their pre 2008 figures, but they seem to have got off the bottom reasonably well.
In fairness, they haven't been doing drastically better than other ETFs. The general recovery has been in the order of about 20%, and the Active Management ETFs are roughly in the bandwidth.
Short term (6 months)
There are a few caveats on any forecasts with the Active Management ETFs. These are not big traders, on the scale of other ETFs, and at least one of them, PLK, which is a relatively stable performer, has some quite different chart moves compared to other ETFs. These are not a homogenous class of ETFs, and it would be unwise to consider them to be natural instant winners in short term trading. PLK, a Treasury Bond holding ETF, as a matter of fact, has spent a lot of time above its start price, and has been acting as if the $25 figure is a center of gravity. The other Active Management ETFs, with stock market holdings, have been behaving more like the other ETF categories, following the market. So far it's been no contest, but if the market moves and the bonds don't, the comparison doesn't need to be made.
In 6 months, the moves are likely to react positively to aggressive management, if the management is getting things relatively right, and the mixes don't sabotage the asset base. One thing which needs to be noted when checking charts is that some large trading spikes occur, which indicates support on a pretty picky basis. Spikes tend to relate to downward moves, in some cases, so the buying pattern looks a bit strange.
Mid term (2 years)
It's no great secret that the ETF market is based on some pretty basic principles. Active Management ETFs don't play by those rules, necessarily, and their assets can be quite diverse. Some have holdings in places like Chile, a volatile market where money can definitely be made, and where you need nerves of concrete.
Two years could produce great results, if the Active Management ETFs continue to operate on this obviously very flexible basis. That said, the risk factors haven't gone. Active management means management. They have to produce, and there will be spurs applied in the short term, as the funds demand returns in such a competitive environment.
Long term (5 years)
Such small cap funds are likely to change drastically, over any 5 year period. They have to evolve, and if they don't, they're likely to be replaced with something a lot more dynamic. If you consider these early forms of Active Management ETFs as a general agar plate experiment, they're a qualified success, at least in theory, for viability, but for returns, they still have a lot to prove.
Five years is more than twice as long as these ETFs have been around. It's unlikely that they've yet experienced the full gamut of their potentials, although they've had an unholy dose of negative market environments as a baptism of fire. The Active Management ETFs will need more than cheerleading from pundits to show their right to a place among the giants.
Qualifiers to projections
The Active Management ETFs are featherweights, in terms of net assets, and they're far from being movers and shakers, at this stage. That means they can be moved and shaken by their markets, pretty easily, and their percentiles can get nasty, in theory, because of the diverse nature of their investments. A stock in the Gobi Desert going astray could affect their NAV, for example.
Risk management would pull the plug on any real damage, and walk away. These ETFs aren't articles of faith, as investments. They're a shot at a methodology, and until they start showing some consistency, that's how they should be viewed.
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Last Updated on: 2010-01-14 02:03:40 |
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