Active ETFs Are A Joke

Active ETFs are a joke... and Wall St is the one laughing...

Actively managed ETFs are rising in popularity. They attracted inflows of $27bill in September, bringing total 2024 inflows to a record $240bill. Let's take a closer look at this hot new investment.

Capital Group Growth ETF (CGGR) is an actively managed ETF that invests in large cap U.S. growth stocks. The Vanguard Growth Index Fund ETF (VUG) is a passive index fund with the same investment strategy. In fact, these two funds are 97% correlated. Let's see how they compare across some key investing metrics:

1) Expense Ratio: Investors know it’s critical to evaluate expenses, as they come directly out of returns. CGGR has an expense ratio of 0.39%, which is 10x more expensive than VUG, at 0.04%.

2) Performance: In 2023 CGGR had a total return of +42.2%, while VUG returned +46.8%. That is a difference of 470 basis points in just one year. So far in 2024, CGGR is again underperforming VUG, albeit by only 90bps.

3) Manager Skill: The active ETF is more expensive because the portfolio managers add value by picking good stocks, right? Wrong. CGGR has a lower alpha than VUG, and an active return that is 37bps lower than VUG. Active return is the investment return, minus the return of its benchmark. Shouldn't an active fund have a higher active return than a passive one??

TL;DR - These two funds have almost identical holdings and investment strategy. The main differences between them is that the Capital Group actively managed ETF is 10x more expensive, has worse performance, and the portfolio managers fail to add value beyond the general market, despite collecting higher fees for their supposed "skill."

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Compare important metrics between an “active” ETF (CGGR) and an index-fund (VUG).