Passive vs « semi-active » ETFs?

Investing / Portfolios
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Today in Le Temps journal (in French, some articles behind a paywall) there is a list of articles on ETFs, ESG investing written by economics journalists and asset managers.

Apart from the jargon to drown you in fancy terms and the usual mantra on ETFs vs. active managers who are here to help you, they introduce the concept of « active or semi-active » ETFs. This is new to me :wink:. I’m not sure if it’s something to follow, or just some rebranding to sneak in some fees to the investors interested in ETFs? The article by VZ in French or in German makes me think the latter.

Thoughts?

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Just a side note: ETF just means Exchange traded funds, so the only difference between a mutual fund and a ETF is that you can access it easily via the stock market which has certain Advantages/disadvantages (buy/sell at all open time, no minimum deposit rules etc., but for instance high spread for illiquid ones)

So an ETF can be actually actively managed.

It also could be they are talking about factor-investing, where instead of simple market cap value like most ETFs, theses ones choose/overweight stocks based on certain factors which they promise give a higher return are choosen to select the companies in the ETF.

Will they give higher returns ? no idea, only the future can tell

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Maybe they’re taking about smart beta (basically factors) ETFs?

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Apparently there are techniques that are supposed to work for transparent/semi-transparent ETFs: Active managers welcome non-transparent ETFs

Precidian and ActiveShares ETFs: The Dawn of a New Era for Active Management | HUB | K&L Gates explains the ActiveShares approach.

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I’d be interested in semi-active bonds etf. E.g. where the bonds are weighted by yield per risk or something like that.

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What’s active about that? That still seems passive (assuming risk is equal to the rating), anyone could define such an index if there’s a market for it.

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The definition of an index made from “arbitrary” rules would be the active part for me. I.e. yield / risk could turn out to be a completely stupid measure that I came up with.

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Maybe a Risk-aware Bond index would fit that bill? (And yes, you can get ETFs on that)

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Actually there’s an argument that the bond etfs are great and improved liquidity. (was mentioned in today’s letemps focused in etfs: Les ETF, nouveaux sauveurs de la finance - Le Temps but see also All that drama about fixed-income ETFs was overplayed for example)

What happened is not that the ETF wasn’t trading at NAV, it actually was trading closer to the “correct” price (most of the underlying are harder to trade), by having people trade on the bond etf, it improves the efficiency of the market (and it seems like regulators liked that feature, as it removes some stress from the market, imagine if all those people had to do bunch of OTC trades instead?)

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FYI an index is also arbitrary. In practice you could create the index of companies that @Double_A likes :slight_smile:

(ESG indices are kinda like that :wink: )

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Thanks all for your replies - very much appreciated.

Agree with you @nabalzbhf. In theory an index is clean and transparent, some are actually slightly tweaked on the minute details of the list of stocks represented in the list.

In any case buying super-broad ETFs if fine by me… I just wanted to hear other views on today’s series of articles.

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On this topic, did anyone ever review the active ETFs from JP Morgan? JREU, JREG etc. They seem to be reasonably priced and have outperformed their benchmarks.

The challenge of course is that we never know if they got lucky or they have a well researched strategy to combine elements of passive and active research.

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