Kevin Reardon, owner and president of Shakespeare Wealth Management in Pewaukee, Wisconsin, takes a no-thanks approach to ETFs when they are marketed as hybrids of actively managed and passive funds.

“We use passive funds almost exclusively on the equity side and actively managed on the fixed-income side,” Reardon, a CFP says, adding, “I exclude anything that is in between.”

He wants to avoid equating metaphorical apples and oranges and digging into any details to determine on his own if a fund is either actively management or passive.

“I don’t ask which way the stripes on the zebra are facing today if I want a horse,” Reardon says.

His approach reflects his commitment to stay rigidly within the lines of his particular investment philosophy, which calls for him to rely on actively managed funds for fixed-income investments, and passively managed funds for equity investments.

Casey Kupper, by way of contrast, takes a more flexible approach and does not rule out entirely the possibility of his clients investing some of their assets in hybrid ETFs.

A CFP and wealth advisor with Dallas-based Cadent Capital, which is affiliated with Raymond James, Kupper examines the hybrid ETFs closely and determines if funds are actively managed or passive, regardless of what their promoters claim.

Some hybrid ETFs, tagged as “smart beta, “factor invested” or “strategic beta,” are represented as passive because they have an underlying basis with a mainstream passive index. It is a “misnomer”to use the word “passive” to describe those ETFs, Kupper says.

“There is an inherently active decision with the weighting of these,” he says.

For example, the issuers of such hybrid funds may increase the percentage of stock shares of companies based on their values, by comparison to what would be found in a truly passive S&P index fund.

As long as advisors recognize their actively managed characteristics, hybrid ETFs may be “useful” when developing a complimentary portfolio construction strategy to couple an otherwise passive investment approach, Kupper says.

“It’s a handy way to tweak exposures in portfolios,” he says about the hybrids.

The hybrids offer a cost effective option for clients investing in certain sectors, such as international markets, real estate and commodities, where fewer analysts and stock pickers follow the space than, for example, in the U.S. equity markets.

In such sectors, more active management of asset selection may be warranted but may not be necessarily worth the price associated with a traditional actively managed fund, Kupper says.

But he still recommends caution.

“We’ve seen these funds proliferate, and you need to approach them with a healthy skepticism,” Kupper says.

This story is part of 30-30 series is on Navigating the Growing World of Choices for Client Portfolios.

Miriam Rozen

Miriam Rozen, a Financial Planning contributing writer, is a staff reporter at Texas Lawyer in Dallas. Follow her on Twitter at @MiriamRozen.