Are Actively Managed ETFs Worth the Extra Cost?

The attraction of exchange traded funds (ETFs) has been the low cost of investing in them, simplicity of their focus, and the ability to pretty much sit back and let it run without having to do much more than occasionally check up on how it is performing.

In other words, it's close to being the perfect passive investment, and the key is to select the right sector to invest in and let it run.

Now that investment firms have seen how many people have been putting their money into ETFs, they've started to move toward creating new ETFs which will involve active management of the fund, which of course means it'll cost more to be involved in the fund.

The question is, is an actively managed ETF worth the extra cost? My answer would be definitely no at this time.

There are very few managed funds of any type where the management makes a real difference and are worth the added expense, and in the case of an ETF it's even more so, as the nature of the investment itself makes an active manager even less important than say a mutual fund.

Of course there will be all sorts of sales pitches telling investors differently, but that doesn't matter in the end, as it's still the truth that paying extra for an ETF is a waste of money.

For example, let's say you invest in a gold ETF backed by the metal. It's based on the price of gold on a daily basis, and it'll fluctuate accordingly. Why would you want to pay someone more for that when you just invest in a regular ETF at an inexpensive price point and let it stay there.

It's one thing to need some hand-holding in relationship to investment strategy and goals, it's entirely another to put your money into an easy to understand ETF and do nothing except watch how it performs over a period of time.

To me, it's nothing more than being opportunistic and attempting to take advantage of the growing popularity of ETFs for companies to offer them as actively managed in order to generate more income from them.

While that's not unethical, it is unnecessary from an investment standpoint, and it's a waste of money to put your money in an ETF that is managed rather than just put in one that isn't; for less costs and performances that aren't going to be any better than their competitors.

Again, I make that assertion based on historical proof that very few fund managers of any type or time outperform the S&P 500, let alone generate more income than their peers. So why pay extra money in relationship to an actively managed ETF when you don't have to? The answer in my opinion is you shouldn't.