Here are some active advantages for the long-term ETF investor
Earlier this month, S&P Global released its “SPIVA U.S. Mid-Year 2022” report, highlighting the state of active management and how it performs against their benchmark. Despite this being the best year so far, the report found that 51% of large-cap active fund managers are underperforming.
And for the long term, the shortcomings balloon even further: 84% underperform after five years, and 90% do so after 10 years.
“The function of any market is to find the right price and make it available to people who want to buy or sell,” Charley Ellis, author of “Winning the Loser’s Game,” told CNBC’s Bob Pisani on “ETF Edge” on Monday.
“When I came out of Harvard Business School in 1963, there were no courses on investment management. Now there’s seven,” he added. “And trading volume on the NYSE was 3 million shares, now it’s somewhere between 6 and 8 billion shares a day.”
Ellis said that the increase in the number of people getting involved in active investing over time, along with greater access to market knowledge, has made it easier for investors to do professional trading on their own.
“Anytime you go into the market as an active manager, you’re buying from and selling to other people that know exactly what you know, just as fast as you know it,” he said. “That makes it awfully hard to get ahead of anybody else.”
Amid the current volatility that’s influenced by a number of factors, markets are especially more unpredictable regardless of the information an investor is privy to.
“It’s important to remember that efficient market theory doesn’t say markets are priced correctly every day,” Nick Colas, co-founder of DataTrek Research, said in the same segment. “It says that there’s no reliable way to find the mispricing, and that’s still true. And that is why active management is so hard.”
Colas said that there’s no consistent method to establish outperformance of benchmarks, so it’s up to individual investors to create their own strategies or seek out an active manager to assist.
“Every great investor has one phenomenal idea,” he said. “A phenomenal idea that people didn’t believe for a long time. And that’s been proven true.”
While active management might be better suited for laborious strategies like playing the bond market, the lines between active and passive are becoming more blurred.
“There’s actually no such thing as passive management,” Colas said. “Everything, including buying an index fund is still a choice. Those choices are informed by emotion, and that is something that we battle a lot”
On the topic of indexed funds, Colas also advised to not take active management for granted. He said that he encourages his clients to look at longer-term trends on a global scale.
For example, Colas recommended comparing the S&P and Russell indexes to emerging market ETFs. EFA and EEM are up 3% a year for the last 10 years, he said, and the S&P is up 10% in that time period.
“We recommend underweighting [EFA and EEM] as dramatically as you can possibly stand,” Colas said. “Because those are not moneymaking areas and, according to the current structure, they never will be.”