ETF TrendTracker Review

A is for Alpha. A is for Actively managed.

The newest offerings from Horizons are the Horizons AlphaPro Managed S&P/TSX 60 ETF (HAX) and the Horizons AlphaPro Gartman Fund (HAG.UN). These are the first two Canadian ETFs with active management.

Active management is what converted many mutual fund investors to ETF investors in the first place. Since 80-85% of actively-traded mutual funds under perform the closest matching benchmark index, it seemed crazy to stay with mutual funds when index funds and index ETFs came on the scene.  Since most ETFs passively follow the movements of the underlying index, they should rarely ever under perform that index.

Well, apparently the Horizons people are willing to prove that they’re part of that 15-20% who will have better returns than the indexes; so let’s have a look at what they’re offering…

With HAX, the goal is essentially to re-weight the constituents of the S&P/TSX 60 index so as to overweight sectors that show greater potential and underweight sectors that are expected to under perform.  The portfolio is expected to be rebalanced twice weekly (the active management part of the equation).  The MER is 0.7% and there is also a performance fee (kind of a “bonus” to the manager if the fund exceeds certain preset values).  So the worst part of mutual funds (active management) is also being joined by the second worst aspect of mutual funds (higher fees).

The rebalancing of the portfolio will be guided by a methodology provided by Ron Meisels of Phases & Cycles Inc. Since the methodology also includes short-selling, HAX is also starting to look like a hedge fund.

HAG.UN, on the other hand, doesn’t even pretend to follow an index.  It is based on recommendations coming from a newsletter… The Gartman Letter. The stated objective is to provide an “opportunity for capital appreciation through long or short positions in global equities, commodities, fixed income and currencies”.

While no explanation is given for the delay, HAG.UN is expected to automatically convert into an actively managed ETF by no later than March 31, 2010.

Naturally, until we have sufficient trading history, we won’t be reporting trend and consistency values for these new ETFs just yet.

It will be interesting to see if actively managed ETFs catch on.  We are naturally skeptical, given the dismal history of the mutual fund industry, but do believe that individual investors can do better than the general averages. Whether it’s choosing the right mix of ETFs, or picking the best performing stocks in an index like the S&P/TSX 60, or simply staying out of the market when overall conditions are poor, individual investors have far more options at their disposal than fund managers.