Why Actively Managed ETFs Haven’t Taken Off Yet
May 30th 2011 at 9:00am by Tom Lydon
Investor interest in actively managed exchange traded funds (ETFs) is on the rise as evidenced by assets under management and the number of providers getting in on the game. Although actively managed ETFs are representative of only about 5% of total assets in U.S. listed ETFs, this means that the room for growth is impressive.
According to MarketScope Advisor, there are a total of 33 actively managed ETFs trading, with about $4.4 billion in total assets under management. Of this number, about 90% are in fixed income or currency-focused actively managed ETFs. According to NSX data, the total ETF assets in April in the U.S. was at $ 1.1 trillion, to compare. About 70% of this is in equity ETFs. [Huntington Reportedly Nears Launch of Active ETF.]
“We see actively managed ETFs sharing the intraday trading and transparency of index-based ETFs, with some of the potential tax efficiency. However, we think actively managed ETFs are likely, over time, to have a cost structure that is more akin to mutual funds,” according to S&P Equity Research. “We think actively managed ETFs are likely to have the greatest appeal in asset categories where investors think assets are more likely to be priced inefficiently.”
As of May 2011, equity-focused actively managed ETFs have yet to gain much traction in the markets. There are about 8 such ETFs, with assets totaling $100 million. The largest obstacle in the active management category for ETFs is the transparency issue. Many managers are still reluctant to reveal their strategies and portfolios, due to the possibility of front-running. With actively managed ETFs, holdings would be revealed on a daily basis.
Another obstacle, though minor, is the lack of a solid track record for performance. The actively managed ETF category is still in its infancy, so any performance track record to date is limited. A proposal to this problem could be a successful mutual fund manager that is willing to create an ETF to mirror the portfolio of their mutual fund or use a manager that has a stellar track record. [Eaton Vance Jumps In the Active ETF Pool.]
Tisha Guerrero contributed to this article.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.