SMART INVESTOR: Don't Be Fooled By The Illustriousness Of The ETF

Matthew Boesler/Business Insider, data from BloombergToday's Smart Investor tip comes courtesy Andrew Haigney of El CAP, who lays down some hard facts about Exchange Traded Funds (ETFs).

ETFs may be taking the investment industry by storm but they could be dumbing down active investment management.

The reason? They're more like regular old index funds than most managers would care to admit.

Here's why that's a big problem, per Haigney:

By embracing ETFs, active managers have wholeheartedly embraced indexing. We don’t have anything against indexing, in fact in most cases it’s the right way to go. But remember that the only reason an investor pays an active manager is to get investment returns above and beyond the index. When active management strategies heavily rely on the use of ETFs, investors get stuck with indexed returns, with very little chance for relative out performance.

For years, active managers have vehemently denied that they shadow their respective index benchmarks. They fought the case for indexing tooth and nail. But ETFs have turned out to be the active managers’ solution to indexing; it’s a classic case of if you can’t beat them join them. Gone are the days when many firms would highlight the ability of their research departments, and how, through diligent research, they could deliver exceptional investment returns.