Pros and Cons of a New Category of ETFs

It took more than a decade of negotiating to get approval from the Securities and Exchange Commission, but actively managed exchange-traded funds finally came to market this year.

Though the funds operate under strict transparency requirements and trading rules, they are so new, and as yet, so few, it's hard to assess their usefulness and how they are likely to fare as an investment option.

The first active ETFs went public in early March, and so far there are only 11, though all major ETF providers claim to have their own versions in the pipeline.

Invesco PowerShares recently introduced four actively managed products. Two of them are structured in a way that's fairly typical of actively managed funds: each invests in 50 companies drawn from specific universes of stocks.

"Stock selection is driven by companies with strong earnings growth, low valuation relative to growth, and positive money flow," said David O'Leary, chairman and chief investment officer of AER Advisors and portfolio manager for the two funds.

Under the funds' rules, O'Leary can change up to three positions per week. This makes the funds more flexible than traditional index-based ETFs.