ETFs That Turn Off 'Autopilot'

Sorry money managers, but there’s another reason to hate ETFs (exchange-traded funds): they’re getting smart. Which isn’t to say that the ETFs you love and trade now are “dumb”—but they are passive.

Most ETFs are built to track an index, sector or region and their holdings are mostly the same from quarter to quarter.

Not so with the next generation of “smart” (or actively managed) ETFs. In these relatively new vehicles, the components are hand selected by an active manager who is committed to a strategy—not a sector.

A new one entered the fray this week: the first ‘short-only’ actively managed ETF, AdvisorShares’ Active Bear ETF.

John Del Vecchio, manager of the Active Bear, explained his playbook for finding shorts on CNBC's "The Strategy Session" on Thursday: “Basically, our process is we look for companies that are masking a deterioration in their business through aggressive accounting and trying to pull the wool over investors eyes.”

Del Vecchio sees Juniper, Avon Products, Kohls and Bank of America as among the juiciest shorts out there.

Why does this matter to your money?

The number of actively managed ETFs is growing: up from one in 2008 to a few dozen today. In just the last year, the assets under management of actively-managed ETFs has nearly doubled to $107 million from $58 million, according to Deutsche Bank.

As these new tools gain popularity, they essentially give retail investors access to hedge fund-like strategies (without the million dollar minimum buy-in).

But all the blood, sweat and tears put into managing a “smart” ETF doesn’t come free: the net expense ratio is 1.85 percent—not far from the 2 percent charged by a bona fide hedge fund.

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