Exchange-traded funds continued to attract assets in 2012 while money has been exiting  equity mutual funds. Still a majority of assets continue to be invested in actively managed products: As of the end of 2011, of the nearly $13 trillion invested in funds, index and exchange-traded funds comprise only about 8 percent, according to the Investment Company Institute.

As active investment managers who have experienced bull and bear markets, the financial industry’s deregulation and re-regulation, and the shifting needs of baby boomers, we are pleased that actively managed mutual funds continue to be the choice for a significant portion of portfolios.

The ETF industry has matured from its adolescent days, yet it continues to morph in puzzling ways that produce mediocre results. In my blog, I’ve discussed some eye-openers to help investors understand the risks of ETFs before putting their money in a product that might end up with unexpected outcomes.

Take the relatively new iShares MSCI Global Metals & Miners ETF (PICK), which began trading at the beginning of February 2012. The ETF is based on the MSCI ACWI Select Metals & Mining Producers Ex Gold & Silver Investable Market Index, which is a non-diversified basket of companies located in developed and emerging markets that are involved in producing or extracting metals or minerals. Its 10 largest holdings make up 50 percent of the index, which makes it a more concentrated, potentially more volatile, portfolio.

By comparison, as of November 30, 2012, the top 20 holdings in the Global Resources Fund (PSPFX) make up 43 percent of the overall portfolio.

In theory, one chooses a natural resources investment to gain access to the companies that stand to benefit from the world’s growing needs of natural resources. In addition, commodities offer portfolio diversification, as they have historically had a lower correlation to the overall market.

However, in a faceoff, PSPFX would steal the puck from PICK, as the Global Resources Fund has outperformed the ETF by nearly 13 percentage points since PICK’s inception in January 2012.

PSPFX also added significantly more return with less risk compared to the ETF over the same timeframe. The Global Resources Fund experienced an annualized standard deviation of 15.95 percent compared to the PICK ETF, which had an annualized standard deviation of 24.34 percent, according to Morningstar Direct.

You can also compare two gold equity investment vehicles. Although gold miners have had a challenging year, the Gold and Precious Metals Fund outperformed the Market Vectors Gold Miners ETF (GDX) by 400 basis points.

As I often remind investors during presentations, there is no free lunch on the commodities table—every investment comes at a cost or a risk. When it comes to emerging markets and commodities, there are inefficiencies that we believe give active managers an edge. In emerging markets, the capital markets are not as sophisticated as in developed markets and the information can be less uniform and straightforward. Managers who have an explicit and tacit knowledge of the country and its way of doing businesses are likely able to flush out the best opportunities. We believe it is worth paying a bit more in management fees to get the expertise needed for these specialized markets.

The Eastern European area is a good example of a nuanced market. While the presidential reelection of Vladimir Putin in Russia caused markets to stress over how he would lead the country, Turkish stocks have experienced substantial growth. U.S. Global Investors’ Eastern European Fund (EUROX) benefitted from its ability to invest in the entire area: Russian stocks make up only about 37 percent of the fund while Turkey comprises 17 percent of the fund. See the fund’s regional breakdown here.

We believe this is why we have significantly outperformed the Market Vectors Russia ETF year-to-date as of December 13, 2012:

Indexers often argue that active managers have periods of underperformance. Fellow Canadian Wayne Gretzky has been called the greatest hockey player ever, holding or sharing more than 60 records that he collected during his 20 seasons of playing in the National Hockey League. He holds the NHL record for the most hat tricks—achieving three goals in a single game more than 50 times—and when he retired, Gretzky was inducted into the Hockey Hall of Fame.

However, under asset management’s rigid standards for active managers, the “Great One” might be considered a loser, as his team won the Stanley Cup “only” four times.

From time to time, active managers underperform; yet, they have the opportunity to add alpha. ETFs, on the other hand, are built to only match the benchmark and are never expected to beat it.

While ETFs offer instant execution, liquidity and lower fees, certain passive investments may not get you where you want to go over the long-term. The “hat trick” equivalent that Global Resources, Gold and Precious Metals, and Eastern European Funds has been able to achieve this year against their respective ETF peers is more diversification, better historical performance and less volatility.

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Click here for more information about the performance, investment objectives, and expenses of the funds and ETFs discussed in this commentary.

Last Friday, President Obama addressed the two topics that have been on many equity investors’ minds since election night: the economy and the dreaded “fiscal cliff.” In his speech, he delivered his familiar plan to combine spending cuts with increasing revenue by raising taxes on the wealthiest Americans. That’s “how we did it in the 1990s, when Bill Clinton was president,” says the president.

Clinton’s legacy was forged under a very different global scenario. He took the reigns just after the end of the Cold War in 1991. As the Soviet Union collapsed, we saw the very beginnings of globalization, with the world opening up to capitalist markets. There were lower labor costs around the world, so companies outsourced, encouraging global growth.

With lower military costs, the U.S. was benefitting from a “peace dividend,” allowing President Clinton to reallocate the spending from military purposes to domestic reforms. He deregulated the telecommunications industry, which helped unleash the Internet.

The confluence of global events combined with policymaking that encouraged business expansion and job creation helped Bill Clinton to be able to boast “the lowest unemployment rate in modern times, the lowest inflation in 30 years, the highest home ownership in the country's history, dropping crime rates in many places, and reduced welfare rolls,” according to the White House’s biography of the former leader.

Clinton also declared that “’the era of big government is over.’ He sought legislation to upgrade education, to protect jobs of parents who must care for sick children, to restrict handgun sales, and to strengthen environmental rules,” says the White House.

Over the past four years, we have not seen the same sort of government policies from Washington. The concern from business owners lately has been an issue that I’ve expressed over several months. When questioning whether an Obama win was a negative for equities, Credit Suisse pointed out that there was apprehension around a less business-friendly environment of “big government financed by taxation, more regulation etc.,” such as the additional cost incurred because of Obamacare.

To increase government revenue, it’s proposed that the top tax rates on dividends would increase from 15 percent to 39.6 percent for those earning more than $200,000 a year. He also wants to increase the tax rate on capital gains from 15 percent to 20 percent.

If this happens, Credit Suisse estimates that these tax increases would take about 5 percent off of the fair value of the S&P 500 Index, as “a third of the U.S. equity market is owned by individual investors who earn more than $200K a year.” Rather than reinvesting dividends and capital gains back into the stock market, these investors will be instead handing the money to the government.

Credit Suisse believes that even if a Mitt Romney administration would have been more business-friendly, there are two aspects to a reelection of Obama that equity investors might want to consider: 1) an Obama win means the Federal Reserve will continue to pursue its current policy and 2) a “fiscal cliff” compromise should be easier with an Obama victory compared to “a narrow Republican victory.”

The upcoming debate over the “fiscal cliff” is a new chance for the newly reelected president to show leadership, reach across the partisan table and work out a bipartisan solution. I believe a resolution to this important issue will be positive for markets.

As Credit Suisse says, “It is worth remembering that Clinton was able to do a deal with the Republicans in his second term (with a Republican House and Senate) after the lack of compromise in his first term led to a government shut-down.”

John Derrick, Director of Research, contributed to this commentary.

The S&P 500 Stock Index is a widely recognized capitalization-weighted index of 500 common stock prices in U.S. companies.

With a greater international exchange of ideas, goods, services, and talent today, our world has never been more wired and connected. Globalization has wholly transformed how people across continents absorb information and interact with each other. I believe it also has subtly changed how we think and act as individuals.

Take the unfortunate consequence of globalization after the anti-Muslim “movie” was posted online. Middle East violence against the U.S. erupted because of drastically conflicting ideas between freedom of speech and derogatory insults against a religion. In a recent Foreign Policy blog, Abdulaziz H. Al-Fahad calls for mutual tolerance in our “shrinking world,” explaining, “The world is increasingly pulled together by the relentless push of modern technology and integrated economic systems on the one hand, and simmering conflicts periodically manifested on the cultural realm, on the other.”

Events need not be so significant to make a difference. I recently revisited the ideas from one of my favorite business books, The Tipping Point, in which bestselling author Malcolm Gladwell uses real-world examples of little things that spread like wildfire. He says that “the best way to understand the emergence of fashion trends, the ebb and flow of crime waves … or any number of the other mysterious changes that mark everyday life is to think of them as epidemics.”

Facebook has been incredibly infectious. Since its miniscule beginnings at Harvard eight years ago, the social media site’s popularity as an online place to connect and exchange ideas and photos has proliferated, attracting 1 billion monthly active users today. This figure is nearly 15 percent of the world and three times the size of the population of the United States.

According to ITU World Telecommunication, 2.3 billion people worldwide were using the Internet at the end of 2011—that means that a significant portion of the online world has a Facebook account.

The Super S-Curve in global population is also significantly affecting our ideas, opinions and ways of life. While it took about 150 years for the world population to grow from 1 billion to 3 billion people, it took less than 15 years to add the next subsequent billion. Now there are 7 billion of us, with many people on the planet acquiring a little more wealth every year. The World Bank said that about 1.3 billion people around the world live on less than a $1.25 a day. This is the lowest number of people ever.

Back when the world only contained 3 billion people, the economic and political footprint of India and China did not exist. Now the two most populous countries in the world are pursuing policies that are encouraging economic growth and improving standards of lives for their residents. I believe these countries are creating a domino chain of reaction felt around the world.

In The Washington Quarterly, William Overholt from Harvard’s Kennedy School of Government outlined his view on how China’s economy will develop as the pyramid of power shifts to new leadership. He says many see China as a “successor to British and U.S. leadership through globalization,” and one final step in that global direction is to develop a “globalization of talent” in the country.

To that end, China insists that all residents must take seven years of English before graduating from high school. Many elite families in the country have children in Ivy League universities, and Chinese vice ministers much spend a semester at Harvard “to ensure their understanding of global best practice.”

In addition, more than 70 percent of Chinese university presidents and research lab heads obtained Ph.D.s from foreign institutions, says Overholt.

Time will only tell whether China takes over as the world’s largest economic superpower. What’s important for investors is to be aware of the ideas and behaviors that are catching, and how our social networks can be contagions, as suggested by Harvard’s Nicholas Christakis in a recent TED Talk.

Likewise, Gladwell shows how minor changes in our external environment can have a dramatic effect on how we behave and who we are.

Next time you read a headline on your TV, phone or newspaper, I hope you are inspired to think of ways that local and global biases and opinions infiltrate your world.