Mutual fund firms suffering from years of outflows and manager underperformance are considering entering the exchange traded fund business with actively managed ETFs.
T. Rowe Price (NYSE: TROW), Fidelity Investments, Franklin Resources (NYSE: BEN), Janus (NYSE: JNS) and Columbia are among the firms who have been cleared to launch ETFs or are working with the SEC to do, Jason Kephart wrote for Investment News.
“Most of the fund companies, including T. Rowe, already have laid out plans for active bond ETFs. Granted, only Columbia actually has filed for active stock ETFs, but given that most of these firms were built on stock picking, it’s probably safe to assume they’re at least being considered,” Kephart reports. [Legg Mason, T. Rowe Price May Join Active ETF Pool]
Stock picking with ETFs is anticipated to be the next big sector of growth. [Mutual Fund Companies Readying Active ETFs]
Over the past seven years, investors have been gravitating away from actively managed mutual funds, reports Kephart. Reasons range from underperforming a benchmark, tax ramifications or saving principle through paying lower fees. In 2012, investors took out $134 billion from mutual funds, a bit higher than the $132 billion that was redeemed in 2008. According to Morningstar data, the mutual fund industry has not had net inflows since 2005. [Why ETF Providers are Stepping Up Their Game]
As a group, index mutual funds and ETFs have gathered more inflows over the same 7 years. In 2012, passively managed funds have gained $69 billion in new inflows.
“It’s not about active versus passive,” Mr. Kinniry said in a recent interview. “It’s about fees. We’re in the early innings of prolonged lower returns. Costs really matter.”
An average broad-based, large-cap focused ETF can cost about 0.10%. A comparable mutual fund can cost around 1.20%, which can really cut into principle. Plus, actively managed mutual funds also deliver capital gains to all shareholders, regardless of activity. The costs can add up quick, and in this uncertain, yield-starved environment, every dollar counts. [You’re Fired: Investors Drop Underperforming Fund Jockeys and Buy ETFs]
“While that’s no guarantee of performance, it’s no surprise that managers who run funds with higher expenses will probably have a harder time outperforming over the long haul,” said Michael Herbst, director of active fund research at Morningstar.
Tisha Guerrero contributed to this article.