“Selling” ETFs isn’t impossible Matt; you just won’t like it.

Let me get the easy parts out of the way here: I agree with you for the most part. Active management is, mostly an expensive boondoggle. Just look at the quarterly SPIVA reports. The vast majority of active mutual funds do a terrible disservice to investors.

And because it’s so obvious, actively managed mutual funds should be a dinosaur—but boy are they not. Just look at the mutual fund league tables from Morningstar:

For ETF investors, this is a pretty weird looking table. Vanguard, sure, but how many ETF investors even know what kind of business Franklin and Dodge & Cox are even in? There’s trillions of dollars—with a T—at risk at these big active management shops. And that money will, inexorably, migrate toward the ETF structure over time.

It’s clear that many of the hurdles—portfolio construction and disclosure in particular—are being overcome to bring traditional active management to ETFs. Personally, I don’t think that’s a great thing either, because we all know most active management is a bad idea for investors. But the structural impediments are gone.

So how do these big shops get around the sales practices issues you discussed? Well, here are my two ideas.

1: Refile existing products. Yes, we’ve seen a few companies (PowerShares for one) file for new closed-end funds that could automatically convert into ETFs, but these haven’t actually taken the world by storm. However, I don’t believe there’s anything that could make it impossible for, say, American Funds, to take the Bond Fund of America and simply convert it to an ETF, hook, line and sinker. Most ETFs are already 1940 Act mutual funds with extra prospectus language, to start with.

A full-scale conversion like this would be radical, and difficult, but I believe it would let the active shops keep—and sell on—their track record.

2: Share classes. To pick on American Funds, their bigger funds are already available as nine different classes of shares, some of which carry old-school crazy sales loads, and some of which carry no loads or 12b-1 fees whatsoever.

Vanguard, of course, has the patent on structuring ETFs as share classes of existing funds. But I have no doubt that with the amount of money on the line, a creative solution to the patent issue could be found. It’s perhaps worth noting that at Vanguard, you can actually move from mutual fund share classes to ETF shares as a nontaxable event. It works that well.

Either one of these ideas likely solves the track-record problem. But they don’t necessarily solve the sales problem.

Or do they?

Currently, many active shops offer share classes designed for fee-based financial advisers. In the case of American Funds, it’s their “F-2” class. These adviser-class shares are actually a reasonably good deal for investors—you can get into Bond Fund of America for a paltry 41 bps in total expenses. Most likely, there’s no kickback in those 41 bps at all, since there’s no 12b-1 distribution fee in the mix (and frankly, I don’t know any decent adviser who hangs their shingle as a fee-only adviser that would take one).

So Big-Active is already doing this, relying on track record, brand and fingers-crossed wholesaling to the financial adviser community, without the quid pro quo of 1980s-era commissions and trips to Hawaii. There’s really nothing in the way of them extending the model into the ETF world.

My real question is, what’s taking them so long?