Actively Managed ETFs: Coming Soon to an Exchange Near You?

The possibility of an actively managed exchange-traded fund, or ETF, has been bandied about for two years now, and the Securities and Exchange Commission once again renewed interest in the idea at last week's annual meeting of the Investment Company Institute, the fund industry's trade group. At the meeting, the SEC indicated that this summer it would look into the possibility of allowing actively managed funds to trade on exchanges.

In a bid to attract assets and make a name for themselves as groundbreakers, fund sponsors have been pushing for actively managed ETFs. But, oddly, they have said little about what benefits, if any, an actively managed ETF would have for investors. The amount of assets in index-based ETFs has grown rapidly in recent years.

The greatest benefit an actively managed ETF could offer over an index-based ETF would be the opportunity -- if managed by a particularly adept portfolio manager -- to beat the indices, while still offering all the benefits of an index-based ETF, namely, low fees and trading flexibility. ...