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Fleet-footed RIAs storm into the active ETF market as fund giants tie pretzel dough

Front-running is real concern for the likes of American Funds or Fidelity Investments but not for little guys with no track records

Author Lisa Shidler May 11, 2015 at 7:32 PM
no description available
Justin Carbonneau: Even though we're active, we always make changes on a Friday and it's a 28-day-cycle and we're changing 10% of the portfolio each month.


Stephen Winks

Stephen Winks

May 11, 2015 — 8:58 PM

The promise of active ETFs will not take advisors where they want to and need to go.

There are top performing active managers that have 20% or less portfolio turnover, which means much thought is given in putting on each investment position. There is a difference between traders and investors. Warren Buffet being an exemplary investor. Traders as a rule are rarely consistently top performers. The active ETF innovation is important but not because transparency encourages front running which is a traders game. There is a misunderstanding in professional ranks of how a manager goes about efficiently and effectively constructs portfolios. We continue to confuse trading (brokerage suitability duties) with investing (advisors fiduciary duties) , never learning from one generation to another.

There is a real problem with conventional mutual funds as individual client holdings data is not available which preclude continuous comprehensive counsel required for fiduciary duty. It is impossible to manage through mutual fund product packaging to manage in real time investment values in real time like risk, return, cost structure, tax efficiency, liquidity, time, etc. essential for the advisor to fulfill their ongoing duty of loyalty. This vigilance is essential for public trust as required by statute, yet is not a consideration under a suitability standard.

A more modern approach to portfolio construction is required going forward if professional standing and fiduciary duty is to be supported. This will make real time buy/sell manager research for 20 bps or less the most dynamic portfolio construction tool existent that is (1) low cost, (2) totally transparent, (3) does not entail redundant account administration cost at the product, trustee, and client levels that adds no value, (4) facilitates the professional management of an incredible degree of portfolio detail, not possible in a mutual fund. This is how our top private trust banks construct portfolios. Active ETFs are a nice innovation particularly in fixed income, but do not lead to high level portfolio construction of real time buy/sell research of managers.

The industry is not paying attention to professional duty which is the game changer for advisors to win market share in the best interests of the investing public.

Stephen Winks



May 11, 2015 — 11:28 PM

Interesting read. I figured American would eventually get into the ETF business.

Many years ago I began using iShares to construct portfolios. When they first launched the Morningstar Series I thought it looked like a very good idea. It has turned out to be one of the best choices I have made in 21 years in the business.

I welcome active management. It may turn out to work quite well. Especially in the Fixed Income environment.



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Mentioned in this article:

Morningstar, Inc.
Top Executive: Joe Mansueto

AlphaClone LLC
Manager Research
Top Executive: Maz Jadallah

Validea Capital Management, LLC
ETF Manager
Top Executive: John P. Reese

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