Exchange-traded funds (ETFs)have experienced significant growth over the past years, democratizing investment access and appealing to different types of investors. Passive ETFs have some intrinsic features that have likely aided in their popularity, including ease of access, transparency, liquidity, and cost. Passive ETF vehicles are, in many respects, the self-driving cars of the investment superhighway.

Consider the navigator
While it's tempting to think a self-driving vehicle can guarantee a smooth, on-time journey to your destination — unpredictable road conditions, weather, and traffic should also be considered. Similarly, purely passive investment vehicles may not be as equipped as other strategies to contend with unpredictable market conditions. When there’s a hazard or bump in the road, it may be beneficial to have a skilled driver at the wheel.

Active management can add value
Although active ETF2 strategies can have higher fees than their passive counterparts, they have an increased ability to navigate potentially volatile markets. In contrast to passive ETF structures, active ETF structures do not track an index. In active ETF structures, managers maintain discretion to reposition portfolios in ways that may reduce turbulence. Passive ETF structures, on the other hand, are more likely to encounter the same turbulence headlong because they are designed to track an index. Therefore, they should travel in the direction of the index. It is true that quantitative, model-based investing can help remove emotion from investment decision making — helping investors maintain a consistent speed, or allocation positioning, over time. However, active management can help portfolios more effectively adapt on a forward-looking basis if and when instability is anticipated.

DOL Rule Brings Landscape Change
The new fiduciary standard being implemented by the U.S. Department of Labor in April 2017 may well accelerate the merging of active management tenets and passive investment structures. Financial advisors are likely to have more investment strategy options to consider as they help clients pursue their long-term financial goals. While the long and winding road of markets is forever changing, an actively-managed view of the horizon line may help pave the way for a more adaptable investment process.

Stay up to date with current market conditions on our Latest Insights page.

Investing involves risk, including the risk of loss. Investment risk exists with equity, fixed-income, and alternative investments. There is no assurance that any investment will meet its performance objectives or that losses will be avoided.

ETFs trade like stocks, are subject to investment risk, and will fluctuate in market value. Unlike mutual funds, ETF shares are bought and sold at market price, which may be higher or lower than the ETF's net asset value.

1 An exchange traded fund, or ETF, is a marketable security. ETFs trade like a common stock on a stock exchange and experience price changes throughout the day as they are bought and sold.

2 Active management (also called active investing) refers to a portfolio management strategy where the manager makes specific investments with the goal of outperforming an investment benchmark index. Passive management (also called passive investing) is an investing strategy that tracks a market-weighted index or portfolio.

This material is provided for informational purposes only and should not be construed as investment advice. The views and opinions expressed above may change based on market and other conditions. There can be no assurance that developments will transpire as forecasted.


Related Articles

Low Volatility and High Uncertainty: What to Make of It?

Understanding current market conditions and what might be expected in the near term.

U.S. Asset Allocation Trends – Winter 2017

Moderate model portfolio performance in 2016 was a tale of two halves.

Advisor Atlas: Understanding Brexit

Discussing the causes and potential consequences of the UK’s "Leave" vote.