The closure of the Meet Kevin Pricing Power ETF, managed by popular financial influencer Kevin Paffrath, marks another chapter in the challenging world of active investment management. Launched two years ago with aspirations of outperforming the market, Paffrath announced through his YouTube channel the impending shutdown of his fund due to disappointing performance and high operational costs. With only $32 million in assets, the fund has significantly lagged the broader market, trailing the S&P 500 by approximately 26 percentage points since its inception in November 2022.
Paffrath, known for his engaging financial content and over two million YouTube subscribers, mentioned the heavy toll of operational expenses. The ETF industry has become increasingly competitive, especially for funds striving for active management rather than tracking major market indexes. The financial influencer expressed regret, stating, "All the bankers, the suits, the lawyers, they all get their hands in the cookie jar, and basically you’re left feeding the kitty." His fund charged management fees of 0.76%, surpassing the industry average of 0.69% for actively managed ETFs, compounding the pressures faced.
Despite the swift rise of exchange-traded funds (ETFs), Paffrath's experience highlights the harsh realities of the market. Data from Citigroup Inc. indicates as many as half of the approximately 3,900 US-listed ETFs struggle to cover their annual operational costs. Michael Venuto, co-founder and Chief Investment Officer at Tidal, which assisted Paffrath with his fund's launch, commented on the economic hurdles active managers face, particularly related to compliance costs and maintaining investor interest.
While many actively managed funds have survived these struggles, the inflow of money has increasingly favored passive strategies. Paffrath's attempt to carve out success with his ETF showcases the uphill battle for active managers today. According to Athanasios Psarofagis, Bloomberg Intelligence analyst, Paffrath’s closure reminds investors of the difficulty they encounter when attempting to convert popularity from social media to financial market success: "It shows how hard it is to raise money, even if you have a lot of followers. At the end of the day, the thing... what matters is performance. Performance trumps everything."
The rise of competing ETFs featuring other financial influencers and qualified money managers only serves to intensify this competition. For example, financial analyst Tom Lee recently launched the Fundstrat Granny Shots US Large Cap ETF, which has garnered around $900 million since its inception and slightly outperformed the S&P 500. Yet, with management fees still higher than those found with standard index funds, the pressure remains for funds across the board to demonstrate value.
Notably, the broader discussion about active versus passive investing reveals persistent skepticism about the viability of active management. Critics argue the zero-sum game perspective places active investors at the mercy of passive funds, incentivizing market underperformance. William Sharpe, known for introducing this concept, argued, "active managers may not fully represent the 'non-passive' component of the market…It is, of course, possible for the average professionally or institutionally actively managed dollar to outperform the average passively managed dollar, after cost." While the math can suggest limits to the ability of active management to outperform, the real-world application can often create avenues for success.
Recently, research indicates shifts within the market’s structure may offer active managers greater opportunities to distinguish themselves from passive options. The emergence of “neo passive” investors—those investing through specialized ETFs not structured to mirror market capitalizations—allows for diversification and potentially increased returns within areas not fully covered by passive funds. This trend is illustrated by the significant growth of these strategies, which have surpassed traditional ETFs by notable margins since 2018.
Paffrath’s closure of his ETF emphasizes the challenges inherently associated with launching and sustaining performance-driven funds. His attempt to create something enduring, as he put it, came with its share of obstacles, including high operational costs and market competition. Despite aspirations of building a legacy beyond fleeting trends, industry trends have unequivocally reinforced the dominance of lower-cost passive investments as the primary choice for many investors. The experience of Meet Kevin Pricing Power ETF serves as both caution and insight for future endeavors within the complicated ecosystem of active management.