Optimal Asset Management CEO was featured in a recent Yahoo! News article on passive investing strategies.

Speaking on the growth of actively managed ETFs, the article quotes,

In some cases, what looks like a passive fund may be an active fund in disguise, says Vijay Vaidyanathan, CEO of Optimal Asset Management, citing active ETFs as an example. “It does not solve problems for anyone because it’s just active indexing in the guise, or wrapper of an ETF,” he says.

What is an active ETF?

ETFs (exchange traded funds) emerged in the early 1990s as an alternative investment vehicle to mutual funds. For the first 15 years of their existence, ETFs were the domain of passive investment strategies, designed to track a market index such as the S&P 500.

In 2008, the SEC gave the green-light (an “exemptive order”) to the first fully-transparent actively managed ETF. Since then, approximately 100 additional active ETFs have been approved subject to the condition that their “secret sauce” — the rules governing their management — were made fully available to the public.

This year, the SEC granted approval to the first non-fully transparent active ETF, providing a level of opacity heretofore unknown to the ETF universe.

Vijay’s comment in Yahoo! News underscores the confusion that may result from the emergence of active ETFs. Since the majority of ETF assets remain tied to passive investment strategies, it is understandable that one may conflate the notion of an ETF with a passive investment vehicle.

It is important to understand that an ETF is simply a wrapper around a basket of stocks, and that the way that they’re traded varies from fund to fund.