I’m hardly a staunch advocate of actively managed ETFs. As the editor of Louis Rukeyser’s Mutual Funds, I cut my teeth on actively managed mutual funds and developed a methodology for identifying those funds that boast the best potential for future performance. Finding the right managers–unemotional professionals who have demonstrated the ability to make the right call at least 70 to 80 percent of the time–is a cornerstone of successful mutual fund investing. Mutual fund investing, to some extent, is an act of faith. Individual investors can only monitor changes to the portfolio when the portfolio updates are issued quarterly, and those updates come with a 30-day lag. In the world of mutual funds, you need confidence in your portfolio managers.

I’m comfortable with my ability to judge a mutual fund manager’s abilities, but the greater transparency afforded to investors by ETFs has drawn me to this relatively new investment vehicle. Almost every exchange-traded product on the market today is run according to an objective rules-based index. Portfolio holdings are disclosed daily, which means you’re always dealing with a known quantity–a luxury you don’t have with mutual funds. Because ETFs operate on a rules-based index that anyone is free to dissect, front-running isn’t a significant concern.

Nonetheless, it would be foolish to say there’s no place for active management in the world of ETF investing. While it’s possible to build expertise across many industries, there are going to be times when the prudent investor will delegate investment decision-making to a true expert. That’s why I continue to invest in mutual funds and recommend them to my subscribers.

But more often than not, I want to make my own decisions about sectors, industries, broad markets or portfolio structure. I trust my judgment on the big picture more than the ability of a fund manager to consistently get the “micro” calls right. In those cases I want ETFs that offer diversified exposure at a low cost.

That’s why I worry that actively managed ETFs will further muddy the waters.

We’ve seen an explosion of me-too funds that track the same basic indexes as a host of other ETFs already on the market. While that’s generally a positive trend–greater competition generally exerts downward pressure on expense ratios–it also makes it tougher for investors to divine which fund will help them achieve the exposure they’re looking for. Add active management into the mix–and actively managed funds will inevitably carry higher costs–and investors may find it more difficult to choose an ETF.

By all indications we’re likely to see a wave of new actively managed ETFs come to market this year; a development that’s causing me some consternation.

T. Rowe Price Group (NSDQ: TROW), whose mutual funds I have long favored, made initial filings with the Securities and Exchange Commission (SEC) in December, 2009 to launch a line of actively managed equity and fixed-income ETFs. The SEC has been reviewing the use of derivatives by funds of all stripes, which essentially forestalled the launch of almost every actively managed ETF. In a bid to allay the SEC’s concerns and bring those products to market, T. Rowe Price recently amended its filings to reflect that derivatives will not be used in those products.

I expect that T. Rowe Price will be successful in placating regulators and will likely launch their new funds in the upcoming months. Once that occurs, the floodgates to actively managed ETFs will swing open.

Not all actively managed ETFs deserve a bad rap. I use actively managed PIMCO Enhanced Short Maturity Strategy Fund (NYSE: MINT) for cash balances in my brokerage account. But I fear an onslaught of fee-harvesting gimmick ETFs, many of which will better serve the interests of asset managers than those of investors.

When the wave of new actively managed ETFs hits, investors will be better off waiting on the sidelines than jumping into the next new thing.

What’s New

No funds were launched in the past week, though based on SEC filings I expect a raft of new offerings to become available over the next few weeks. Additionally, I expect a flood of new actively managed ETFs throughout 2011.

Winter Respite

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