May 7, 2018

Monday Morning Memo: Are ETFs the better tool for investors?

by Detlef Glow.

While observing the current active/passive fund debate, one could get the impression that investors must make the decision of investing either passively or actively in their portfolios. The talking points of each type of investment are often praised as a kind of dogma. But this is obviously not the case, since investors can use ETFs even if they believe active managed funds are the superior products or the other way around.

Investors who prefer actively managed funds in their portfolios can still use ETFs as tactical investment tools to implement their asset allocation views. ETFs can give them direct access to an asset class that may not be available among actively managed funds or if their investment horizon is too short for an active manager to generate alpha—often achieved only over a longer period.

On the other hand, investors who prefer ETFs can use actively managed funds in segments where active management can add value. Or, they can invest in a fund that is managed by a portfolio manager who has been proven to generate outperformance in the past.

In this regard, investing in active or passive products is not an either/or decision; both fund types can add value to investors’ portfolios. Active and passive funds are like two sides of the same coin—they belong together. Investors should always check which kind of product is most suitable for their respective investment purposes. From my point of view, the discussion about active/passive funds should be scaled back to the level where both kinds of products focus on their individual advantages and not on the dogma that a given product type is the best for all investors. That said, I strongly believe both kinds of products have a place in investors’ portfolios, especially if used in combination. This also means investors must be aware of all the product features and need to take the responsibility of sticking to their personal risk tolerance in order to achieve their investment goals.

The views expressed are the views of the author, not necessarily those of Thomson Reuters.

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