ETF Edge

The 2 biggest issues facing active managers, according to ETF pros

The rise of active management

It's not easy being active — an active manager, that is.

As the exchange-traded fund industry begins to embrace active management with the advent of nontransparent ETFs, those managers may just get another chance to prove themselves after years of asset losses in the mutual fund space.

Nontransparent ETFs, which have been approved for a number of firms including T. Rowe Price, BlackRock and Fidelity, will not require daily disclosures of their portfolio holdings, a plus for active managers who didn't want to move into ETFs for fear of having to publicize their strategies. In the new structure, managers will update their holdings on a quarterly basis.

"The ETF is always going to be the superior wrapper, whether it's nontransparent active or anything else, because you get the tradability, you get the tax advantages of it, and in an active strategy, ... just the tax advantages being in the ETF structure make it worth doing if you believe your active strategy's actually going to outperform and raise money," Dave Nadig, chief investment officer of ETF Trends, told CNBC's "ETF Edge" on Tuesday.

But active managers are still facing two major issues: the challenge of beating a rip-roaring market at its own game, and the potentially hard-to-sell aspect of these up-and-coming confidential funds.

"At some point, all the bad active managers get flushed out of the system, and there are still some active managers that add value," Nadig said.

Ritholtz Wealth Management CEO Josh Brown, however, harbored some concerns.

"The nontransparent thing ... is in response to active managers still thinking it's the 1990s and that someone's going to find out what they're buying and front-run them. That literally does not happen," he said in the same "ETF Edge" interview, conducted at the Inside ETFs conference in Hollywood, Florida.

"There are no celebrity stock market managers who other people are trying to front-run. So, I'm not sure what this is solving or why this would matter," Brown said. "The bigger issue that these funds face and why I'm skeptical that you'll see a lot of big successes [is] they're not systematic. And that is what intermediaries like myself, financial advisors, want more and more every year. We want to be able to explain things to clients — how a fund is built, what it will do, what it won't do — and this is literally a countermove in the opposite direction."

That may soon become a concern for the firms planning to issue these nontransparent ETFs: Who will actually want to buy their products without proof of performance?

The way Nadig sees it, they may already have prospective clients in another corner of the market waiting to make the switch.

"There are still people out there who believe and buy active management, and that's all they buy and that's all they do," Nadig said. "The hope is that those people will migrate from being just mutual fund or separate account investors to ETF investors."

And, luckily, performance may not be a central concern because money managers are only getting "better," Brown said.

"Look at the people heading to Wall Street. They are armed to the teeth with data, with equipment, with wisdom, and there are more of them, and they have even higher degrees of learning, and they're just better competitors," he said. "It's not that active managers suck all of a sudden. It's the opposite. There are too many very talented people all fighting for the same scraps of alpha that are no longer easily harvestable."