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‘Closet Indexers’ and Active ETFs


Some mutual fund managers have been called “closet indexers” for their investment styles, but with the lower fees associated with the exchange traded fund structure, managers could get away with more in an active ETF offering.

Closet indexers have seen assets dwindle as low-cost index ETFs supplanted their costlier actively managed strategies designed to closely follow a benchmark. Investors don’t see the incentive for paying the active manage fees of around 1% for returns that mirror an index ETF that costs less than 0.10%.

However, actively managed ETFs, with fees falling somewhere between retail and institutional mutual fund shares, can allow managers to generate small outperformances to a benchmark, without charging high fees, writes Jason Kephart for InvestmentNews. [The Actively Managed ETF Landscape]

According to Standard and Poor’s, only about 25% of all actively managed domestic equity funds beat their benchmarks over the last three years ended Dec. 31 after accounting for their high fees.

By utilizing the active ETF structure, managers can sidestep 12(b)-1 fees, sales load charges and fees on different mutual fund platforms, which will all help boost the fund’s performance.

“They need every basis point they can get,” Scott Burns, director of fund research for North America at Morningstar, said in the article.

A number of large mutual fund providers are already looking at the actively managed ETF space, like Franklin Resources, T. Rowe Price and Fidelity Investments have filed with the SEC to launch active ETFs. [Fidelity Cleared to Launch Active ETFs: Report]

For more information on active ETFs, visit our actively managed ETFs category.

Max Chen contributed to this article.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.