Mutual Fund Companies Readying Active ETFs
January 15th at 4:00pm by Tom Lydon
2013 could be the year that actively managed exchange traded funds finally take off. Two major catalysts are about to come together to get this sector off the ground early on this year.
“Actively managed ETFs have faced a few big challenges. For starters, many active managers were skeptical of their transparency — other investors would be able to see every move they make, almost in real time. Plus, many active managers use derivatives to control the risk and cash flow of their funds, a practice that the Securities and Exchange Commission banned for two and a half years,” Brendan Conway wrote for Barron’s.
A few developments are taking place that should have appositive impact upon this area of the market. First, the Securities and Exchange Commission has lifted the moratorium on derivatives use in ETFs. Secondly, Fidelity Investments has filed for approval to launch an actively managed corporate bond ETF. This fund is expected to take the actively managed ETF sector to the next level. [Fidelity Files to Launch Active ETFs]
Furthermore, at the start of 2013, T.Rowe Price had gained approval to launch their own line of active ETFs, reports Conway. Franklin Templeton has also filed with The Sec to launch such products, however, Fidelity has all eyes on them.
Although the ETF industry is flooded with innovative products, the large size and distribution can help. Fidelity has both of these traits working for it. The most successful active ETFs trading, PIMCO Total Return (NYSEArca: BOND) and WisdomTree Emerging Markets Local Debt (NYSEArca: ELD), have tracked the bond market. Case in point, Fidelity is also using this sector as an entry point. [ETF Investing Ideas for 2013]
Fidelity is also going a step further and introducing actively managed sector ETFs. The catch? Fidelity’s managers will have to beat the equivalent passive ETF to prove that the higher cost of active management is worth the expense. So far, the active ETFs will be cheaper than the 1% that mutual funds charge, but more than the average 0.18% that a sector ETF costs. [PIMCO Total Return ETF Manager Gross Trims Mortgages, Treasuries]
Tisha Guerrero contributed to this article.
Full disclosure: Tom Lydon’s clients own BOND.
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