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  1. Active ETF Channel
  2. Be Wary of Index Funds Charging Active Fees
Active ETF Channel
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Be Wary of Index Funds Charging Active Fees

James ComtoisApr 25, 2022
2022-04-25

The active share metric can be an effective tool to weed out actively managed funds that merely imitate index funds, yet still charge higher fees. However, it still has limits. Introduced in 2009 by professors Martijn Cremers and Antti Petajisto to provide a new way to measure active portfolio management, fund managers soon used the metric to justify their fees.

“If you buy an actively managed fund, at the least you want to make sure that the higher fee you pay gives you a different product than what you can get at a very low price,” Cremers told Barron’s.

Still, the metric may not be the best way to find if an active fund is delivering alpha. After studying the returns of U.S. stocks from January 1, 2003, through December 31, 2020, a report from Morningstar revealed that funds with high active share “failed to deliver superior net-of-fee results in any category.”

While Morningstar found that funds with the highest active share metrics in the large value, large blend, and large growth categories outperformed their low active share peers before deducting fees, since their fees were higher than average, they still lagged.

Cremers clarified that active share “doesn’t help resolve whether or not a manager has any skill,” but is “more [of] a basic screening device” to weed out index funds charging active fees.

In 2017, Cremers reconfirmed that from 1990 through 2015, low active share funds with above-average fees underperformed their peers on average. Plus, during that period, high active share funds outperformed regardless of fees if the metric was combined with a low holding duration or turnover ratio.

But even as a screening tool, Morningstar strategist Robby Greengold notes that active share is difficult to interpret for some fund categories like small- and mid-cap, “because the distribution of active share in those categories is relatively tight.”

T. Rowe Price offers a suite of actively managed ETFs and has been in the investing business for over 80 years through conducting field research firsthand with companies, utilizing risk management, and employing a bevy of experienced portfolio managers carrying an average of 22 years of experience.

For more news, information, and strategy, visit our Active ETF Channel.

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