In the world of active exchange traded funds (ETFs), the interesting area of portfolios consisting of bonds has emerged.

The first actively managed ETF, the Bear Stearns Current Yield (YYY), was actually a bond fund and launched on March 25. Its counterpart, PowerShares Active Low Duration (PLK) was released in mid-April. YYY is down 0.2% over the past month and PLK is up 1.3% over that same period. However, the future of these type of active ETFs has some question marks and challenges, as reported by Murray Coleman for IndexUniverse.

Based on the short existence of these funds, neither active bond ETF has pulled in big assets from investors. However, in fairness to these funds, there is no doubt that much of the slow response is because of a dismal investment environment overall. However, in the first three months of the PowerShares funds’ lives, the performance results have been promising.

But if the economy keeps slowing, these funds are more than likely to catch a bit of momentum. Even further, any increase in headline shocks could potentially create a unique opportunity for active bond ETFs in a time while interest rates are at somewhat of a low level.

However, active managers seem to outperform in times of great volatility in the market and investors search for yield, while they do not do as well when there is a flight to quality in bond markets.

In comparison to active mutual funds, active bond ETFs may be at a disadvantage being that mutual fund investors are more likely to pay higher fees to offset research costs. ETFs on the other hand, are competing in a much cheaper marketplace and active bond ETF managers will have difficulty charging as much as they do under mutual funds.

Jeffery Ptak, a Morningstar analyst, realizes that along with costs, a key question facing active bond ETFs, and actively managed ETFs in general, is how do they broaden their scope from very liquid market segments in a workable manner? A question that has yet to be resolved.

Tags: PLK, YYY

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