Despite record inflows into active ETFs, Charley Ellis, a pioneer of market indexing, believes they haven't consistently delivered long-term outperformance. He attributes this to the dominance of index funds and the challenges active managers face in finding an edge in a market saturated with sophisticated technology and quantitative analysis.
Active exchange-traded funds (ETFs) have experienced record inflows, but despite this, they haven't consistently delivered long-term outperformance for investors, according to Charley Ellis , a pioneer of market indexing. While the majority of investor funds still gravitate toward index funds due to their lower fees, the ETF industry, while appealing to average investors, has become somewhat bloated.
Ellis expressed this concern on CNBC's 'ETF Edge,' stating that there are too many niche and 'unhealthy' ideas circulating within the ETF landscape. Stock picking may appear straightforward, but historical data reveals a different reality. S&P Global reports that after one year, 73% of active managers underperform their benchmarks. This trend continues, with 95.5% of active managers lagging behind their benchmarks after five years, and a staggering 100% failing to outperform after 15 years. Ellis, a seasoned investment industry figure and staunch advocate for indexing, believes this pattern won't change. He acknowledges that this dominance of index funds has led some to fear for the future of active management, but he argues that active management will persist, although it will continue to be challenging for active managers to consistently find an edge in the market.'The number of people hired into active management keeps rising, and we're overloaded with talent in that area,' Ellis stated on CNBC's 'ETF Edge.' He added that this trend is likely to continue as long as active management remains 'great fun,' associated with high pay and the potential to make significant profits. Despite the recent surge in active ETF inflows, Ellis emphasizes that the index fund and ETF market remains a behemoth, attracting the vast majority of investor capital. He attributes this to unsophisticated individual investors seeking exposure to broad market indexes and target-date funds. While Ellis acknowledges the value of active management, he expresses concern about the growing number of specialized and potentially risky ETFs designed primarily for salespeople rather than investors. He particularly warns against leveraged ETFs, which offer the potential for explosive gains but also carry an increased risk of substantial losses. Ellis believes that the widespread availability of sophisticated computer models and quantitative analysis tools has made it increasingly difficult for active managers to gain an edge in the market. He likens the current market environment to a poker game where all the cards are face up, making it challenging to outmaneuver other traders equipped with similar technology
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