Here’s Tadas again with a good question for a bunch of influential financial thinkers, and also me:
Question: Traditional active management is dying a slow, painful death. Is the introduction of non-transparent, active ETFs a potential turning point or simply a finger in the dike of an unstoppable trend?
Answer: “This conversion has been slowly taking place for years. ETFs are a flat out better product wrapper. 10 years ago I said that mutual funds are dinosaur products and that’s been mostly right.
But you have to be careful with ETFs because of this transition that’s occurring. Despite being a better product wrapper they can still be bad product wrappers. For instance, a high fee active mutual fund that simply rolls itself into a slightly lower fee ETF wrapper is no better than the mutual fund. You have to look under the hood to make sure that you’re not buying the same shitty old type of car with a fresh paint job.”
I’ve been pretty vocal about the fact that there’s really no such thing as passive investing. There’s smart active (diversified, low cost, systematic, evidence based strategies) and there’s dumb active (concentrated, high cost, discretionary strategies). Active ETFs won’t save the latter from losing out to the prior. But they will help firms scale better so they can at least make the transition to a low cost world more viable.
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.