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BTAL Goes Active. The First of Many?

Given the benefits of active exchange-traded funds (ETFs) and their recent returns, it’s not surprising when a mutual fund converts into an ETF. But what is surprising is when a passive fund drops its index and becomes an active ETF. Typically, it’s the other way around, if anything.

Which is why a popular passive alternative’s ETF’s decision to go active is groundbreaking.

By switching its management style, the fund’s sponsors are approving the active ETF movement and highlighting the fact that it can work for investors. The question is whether or not more passive ETFs will follow suit and take the active plunge.

See our Active ETFs Channel to learn more about this investment vehicle and its suitability for your portfolio.

A Top Performer

There are numerous ETF sponsors out there, and sometimes quality smaller firms slip through the cracks. Case in point is AGF Investments. The firm offers a plethora of alternative ETFs designed to provide non-correlated returns. Its chief and biggest fund is the $100+ million AGFiQ U.S. Market Neutral Anti-Beta Fund (BTAL).

BTAL tracks the Dow Jones U.S. Thematic Market Neutral Low Beta Index. This index goes long on low-beta stocks and short positions in high-beta names in the broader U.S. stock market. By offsetting what it holds long and short, it provides a market neutral strategy. Being market neutral allows the fund to produce steady returns in up and down markets. It won’t be out of the park, but it’s designed to create bond-like steady returns.

Or at least that’s what BTAL did. Back during the holidays, AGF Investments announced that it would be changing BTAL’s style. It won’t be switching its index – which is a common thing among passive ETFs – but going full active.

Now, AGF will use managers to build a portfolio that will have a “more consistent negative beta exposure to the U.S. equity market” while continuing to provide a neutral blend of long and short investments. AGF Chief Investment Officer Bill DeRoche says, “We believe an active approach to managing BTAL will provide greater flexibility to produce more consistent negative beta exposure that, when combined with U.S. equity exposure, can reduce U.S. equity market drawdown magnitude, and improve risk-adjusted returns over time.”

Why the Switch?

So, why did AGF switch BTAL’s style from passive to active?

The simple answer is constraints in the index. In this case, the fund’s overall beta had been creeping higher. Thanks to issues with the pandemic and rebounding momentum stocks, it basically threw BTAL’s index out of whack. And since it was a passive fund, managers couldn’t do anything about it and were forced to ride out the changes. This hindered its risk-adjusted performance and wasn’t allowing the ETF to meet its goals.

By shifting to an active strategy, AGF and BTAL will be able to make slight tweaks to the fund to keep it in line with its mandate/goals. That will hopefully allow it to provide a better market-neutral experience for its shareholders.

Will Other ETFs Follow BTAL?

The question now is whether or not others will follow BTAL’s and AGF’s stance and switch their passive ETFs to active ones. The answer could be yes. One of the major critiques of passive funds is that, no matter what, you’re stuck with the index. The rise of smart-beta funds a few years ago has created plenty of potentially inefficient indices and ETFs.

For example, many momentum funds are now overweight technology. This could cause problems later on. Another example could be dividend funds. During the pandemic, many dividend champions held onto their cash or suspended payments to get through the malaise. Passive strategies were forced to take those cuts – and resulting losses – in stride. By switching to an active management style, small tweaks could prevent blow ups, losses and other index-related issues.

Given that BTAL is/was a top performer in the alternatives sector, its switch in style could start a waterfall of other investment managers to begin changing their management styles as well. Will the SPDR S&P 500 ETF Trust (SPY) become an active fund? Absolutely not. But there are plenty of smaller/smart-beta funds similar to BTAL that could.

Better still is the success of many recently active ETFs. Managers may look to the triumphs of these funds and see that being active isn’t that bad after all.

Don’t forget to explore our “Dividend Guide”: where you can access all the relevant content and tools available on based on your unique requirements.

The Bottom Line

AGF Investments’ recent switch of BTAL to an active management strategy could start a trend. Ultimately, the constraints of an index were hurting results at the fund. Going forward, more managers could see their smart-beta or index funds as hindering results for their shareholders. And in that, a new wave of passive to active management strategy shifts could be on.

Take a look at our recently launched Model Portfolios to see how you can rebalance your portfolio.

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Jan 07, 2022