Active ETF Market Gearing Up
April 11th, 2013 at 9:19am by Tom Lydon
Established firms in passive indexed exchange traded funds as well as traditional mutual fund shops are preparing to launch actively managed ETFs.
“If actively managed ETFs can outperform their index-based counterparts, they could be of great interest to both individual and institutional investors. In fact, actively managed ETFs might be the next killer app. Compared to mutual funds, ETFs have the advantage of being publicly traded, and they have a lower fee structure,” Rosalyn Retkwa wrote for Institutional Investor.
“Active ETFs are not only often less expensive than mutual funds in terms of fees and expenses but also hold appeal for investors who don’t have enough money to qualify for the minimum investment levels required by managers of separately managed stock portfolios,” Craig J. Colette wrote for ABC News. [Investment Researcher Picks Best Active ETFs]
Actively managed mutual funds have used strategies such as growth, long term investing and shorting domestic and international equities. Actively managed ETFs are capable of these strategies, and at a much lower cost. [Money Managers Taking Greater Interest in Active ETFs]
There are 1,445 ETFs trading in the U.S., and about 58 of them are active. This equals about 4% of the ETF market share, and about 1% of the industry’s total assets, or $12.6 billion out of $1.46 trillion, reports Retkwa. Around $7 billion of these assets are focused in two funds, PIMCO Total Return (NYSEArca: BOND) and the PIMCO Enahnced Short Maturity ETF (NYSEArca: MINT). [Active vs. Passive Debate Spills into ETFs]
The biggest hurdle that the proliferation of actively managed ETFs face is a transparency issue. Since an ETF is structured to trade in real time and holdings are transparent, managers can emulate, or front-run other managers and replicate strategies. This is a big issue for equity ETFs that are actively managed, but has not been an obstacle for the most successful active bond ETFs. Eaton Vance has found a way around transparency issues, allowing managers to build up large blocks of ETFs without advertising their strategies to the general market.
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.