As fund investors> ease back into equities, they seem ever less willing to pay for a fund manager s stock-picking expertise. Actively-managed funds are on pace to lose share to passive indexes this year, for the fourth year in a row. But fund companies aren t giving up their management fees without a fight. Enter the actively-managed exchange-traded fund.
Still generating buzz after their U.S.-market debut in 2008, actively managed ETFs offer the tax advantages of an ETF, and the customized stock-picking of actively-managed mutual funds not to mention higher fees. The average net expense ratio on an active ETF is 0.70% (or $70 for every $10,000 invested), according to Morningstar. That s nearly half as cheap as domestic stock mutual funds, which charge 1.29% on average, but more expensive than passive stock index ETFs, which can charge less than 0.10%.
In a climate marked by fee-sensitive investors, fund companies would clearly prefer to earn lower fees than no fees at all, says Rick Ferri, a Michigan money manager and author of The Power of Passive Investing. And for investors who want an actual human being to choose their investments, active ETFs appear to be a compromise: active management at a lower cost. Still, for the moment, the market seems skeptical active ETFs make up just 0.2% of the $952 billion U.S. ETF industry.
What is clear, however, is that investors are increasingly choosing lower-priced products and are losing faith in fund managers ability to consistently outperform the market. With $1.5 trillion under management, Vanguard Group, known for its low-cost index funds, overtook Fidelity Investments as the largest mutual-fund firm this year. And Vanguard s Total Stock Market Index Fund (VTSMX)
Even that simply accelerates a trend that started a decade ago, when index funds first started taking market share from active funds. In the last four years, it s picked up speed. Since May 2006, investors have pulled out $342 billion from actively managed U.S. stock mutual funds, while passively managed funds, most of which are index funds, have seen $123 billion in inflows in the same period, according to Morningstar. And until actively managed ETFs gain more stable footing in the market, passive indexes either traditional funds or ETFs may remain the investment of choice for price-sensitive investors. As for the fate of active management? Fund companies will eventually find a better idea, says Ferri: I don t know how they re going to do it, but I m sure they ll figure out some creative way to get your money.
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