Here’s what I love about owning a stock fund. Every day, thousands of employees get up early and travel to work. They break the guts by winning clients, optimizing supply chains and coding, all while generating revenue.
It adds up for me – even when I catch a wave or a few winks on the sofa afterwards. (As I did last week after reading that the bosses done with flexible working.) Shareholders get a share of the spoils, and we don’t have to endure the call to Zoom.
So a big thank you to all those readers who work for one of the 1245 funds in my funds. Already this year your efforts have added £17,000 to the value of my portfolio — I hope to yours too!
This also explains my preference for stocks over government bonds. I much more believe that the 140 million employees of listed companies around the world will jump out of bed every morning than those whose job it is to collect taxes.
Needless to say, however, there is a wide variation in quality between the myriad companies in my mutual funds. Therefore, returns are also dispersed. It is precisely for this reason that active managers justify their existence.
If only it were easy. Winning stocks are hard to identify in advance, and I’ve written about them being questionable before persistence. Also, lower scores don’t stay down forever.
But stock pickers think it’s easier to spot a dog. Even if they miss out on the next Nvidia or Tesla, at least they can make relative gains by removing the losers from the index.
So when I first read Fr boom in the so-called active exchange traded funds, this is what I assumed they offered. When I was a pup, we called it benchmark optimization or tilting.
Index trackers, but they sort out junk based on automated criteria like declining revenue, low margins, high debt, or whatever. But no. Active ETFs boast real stock pickers looking for “long-term capital growth.”
Seriously? Like actual analysts and portfolio managers increasing the value of my ETF — instead of just outperforming the Footsie or Nikkei? Absolutely. But wait, there’s more as those telemarketing ads say.
Unlike the old mutual funds that only price daily and charge like a rhino, active ETFs are also exchange-traded like stocks and cost a third of the price. Sounds too unbelievable to be true, doesn’t it?
To find out, I fired up Excel and downloaded all the funds of the new iShares World Equity Enhanced ETF, as well as their weights (as of the afternoon of January 21 after my run on the beach).
In addition, I did the same for the passive version: iShares Core MSCI World. Both have MSCI World as a benchmark. However, where Core “seeks to track it”, an active ETF aims to increase “your investment”.
I also noted their total cost ratios. The standard ETF charges 0.2 percent annually, and the wizz-bang charges 0.3 percent. At first glance, many readers would consider the latter cheap.
Active management and superior returns for just 10 basis points more? It seems crazy to refuse when it’s set up like that. Plus, you can trade in and out of active ETFs whenever you want.
The problem is that active ETFs won’t make you more money on average. What it will do is hasten the demise of the old-school active funds — the ones I ran charging 50 to 100 basis points. However, they are mostly designed to increase the sales of ETF investors.
Let me explain. Most active funds underperform the index, as we all know. Active ETFs will be no different. Like for like, therefore, it makes no sense to buy a cheaper product.
Meanwhile, investors who believe in efficient markets will continue to buy the cheapest passive ETFs. But some wavers may be tempted with a new yacht and say, heck, those active funds don’t cost that much more.
This is a trick to avoid. Take, for example, two iShares funds. Active still has more than 400 shares, which — ironically — is about the number of shares you need to hold to guarantee the index won’t underperform, as I already previously written. In other words, it is a passive fund.
Both active and underlying ETFs have identical first nine names. They’re also in exactly the same order, with slight exceptions depending on when you’re watching. Amazingly, no active exposure is more than 0.6 percent higher or lower than passive equivalents.
Indeed, the riskiest bets in the entire active portfolio are two positions greater than 0.63 percent. Wow! How to radically elevate Bank of America from 23rd in the core fund to 10th. And move ABB from 141 to 121!
What about those terrible companies that are supposedly so obvious that active fund managers exclude them? Berkshire Hathaway is the largest weighted position in the active ETF with minus 0.55 percent relative to the underlying fund.
Holding on to nothing, then? Er, no — the active fund still owns 0.3 percent, despite Berkshire being its least favorite stock. The next two biggest underdogs — Visa and Exxon Mobile — are even smaller. But not zero.
Sellers of active ETFs will say it’s risk reduction. OK, but not to the extent that these funds are essentially index trackers. Even active managers cannot beat the index even if they have taken on more risk.
No, active ETFs increase fees. And like sparkling water for $5 versus still water for $4 — many people will conclude: why not?
The author is a former portfolio manager. E-mail: stuart.kirk@ft.com; X: @stuartkirk__
