Contrary to intuition, even a fully systematic, rules-based investment strategy benefits from an active ETF structure. This approach avoids third-party index licensing fees and provides crucial flexibility to delay rebalancing during volatile market events, a cumbersome process for index-based funds.

Offering daily liquidity while pursuing a multi-year investment strategy creates a dangerous duration mismatch. When investors inevitably demand their cash during a downturn, the long-term thesis is shattered, forcing fire sales and destroying value. A fund's liquidity terms must align with its investment horizon.

To compete with behemoths like Vanguard, new ETFs must focus on boutique strategies that are too complex, differentiated, or capacity-constrained for trillion-dollar managers. Competing on broad, scalable market beta is futile; the opportunity lies in specialized areas where expertise and smaller scale are advantages.

The continuous monthly inflows of successful evergreen funds create immense pressure to deploy capital quickly. In slow deal markets, this forces a difficult choice: halt inflows and kill momentum, or risk performance dilution from cash drag or investing in lower-quality assets to meet deployment targets.

The minimum seed capital for an ETF has jumped from $5M to over $25M, not due to rising operational costs, but to convey credibility. A substantial launch amount signals to the market that the fund can sustain itself for the 3-5 years necessary to build a track record and attract investors.

For 99% of ETFs, liquidity and bid-ask spreads are not based on the ETF's own trading activity. Instead, they reflect the cost for a market maker to buy or sell the underlying basket of securities. An ETF holding liquid stocks can trade billions with tight spreads, even if the ETF itself is rarely traded.

The dominance of low-cost index funds means active managers cannot compete in liquid, efficient markets. Survival depends on creating strategies in areas Vanguard can't easily replicate, such as illiquid micro-caps, niche geographies, or complex sectors that require specialized data and analysis.

A skilled investor avoided a winning stock because his Limited Partner (LP) base wouldn't tolerate the potential drawdown. This shows that even with strong conviction, a fund's structure and client base can dictate its investment universe, creating opportunities for those with more patient or permanent capital.

Market efficiency increases with company size and liquidity. Therefore, the excess returns (alpha) from investment factors like value are significantly larger in the inefficient micro-cap space. For large-caps, the market is so efficient that factor premiums are minimal, making low-cost indexing a superior strategy.