It’s an ongoing debate amongst advisors as to whether active or passive funds are better, with research to support either kind being touted. Increasingly, asset managers are coming to the conclusion that portfolios with both can provide optimal returns, reports Yahoo Finance.
Passive investing is often seeking to invest in broad market performance to one degree or another. It follows indexes that can screen for market cap, sector, industry, or any combination thereof. Passive portfolios typically consist of a variety of indexed funds that will collectively give exposure to the broader markets and are popular because they are low maintenance and therefore less expensive.
Active investing is commonly known as stock picking and is exactly as it sounds; an investor chooses a money manager whom they believe will generate alpha by following an investment strategy that handpicks stocks that the money manager believes will appreciate in value. Active funds typically seek to beat a benchmarked index, have their own unique objectives, and also come with a more expensive price tag in fees as stocks are traded more often and incur costs each time.
An analyst for John Hancock, Leo. M. Zerilli, wrote a white paper that argues that investors benefit when both strategies are combined in a portfolio. “Blending active and passive strategies can help investors outperform and pursue other important objectives while still being mindful of cost and tax efficiency,” Zerilli said.
Active and passive funds each have different market conditions in which they tend to outperform; passive funds typically perform well in times of sustained, predictable growth, while active funds typically do best in markets experiencing uncertainty and volatility.
Dan Hunt, senior investment strategist at Morgan Stanley, also believes in the benefits to a blended portfolio approach.
“Depending on the opportunity in different sectors of the capital markets, investors may be able to benefit from mixing both passive and active strategies—the best of both worlds, if you will—in a way that leverages these insights. Market conditions change all the time, however, so it often takes an informed eye to decide when and how much to skew toward passive as opposed to active investments,” Hunt said.
For investors and advisors looking to add actively managed funds to portfolios in times of market uncertainty and potential volatility, T. Rowe Price offers five actively managed ETFs covering a variety of investment goals. The firm brings a bevy of experience and research to its products, with portfolio managers averaging over 20 years in investing each, as well as over 400 investment professionals dedicated to researching companies within ETFs.
For more news, information, and strategy, visit the Active ETF Channel.