Future Webcast Sheds Light on Active ETFs; Register Now

This Wednesday, listen and look in on a live webcast about actively managed exchange traded funds (ETFs).

Active ETFs are something you might want to learn more about, as they're an entirely new breed of ETF. Many investors might not understand how they work or how they might find a place in their portfolios.

Along with Tom Lydon, there will be two other speakers at this event: Ben Fulton, the executive vice president of global product development at Invesco PowerShares and Ed McRedmond, senior vice president of portfolio strategies at Invesco PowerShares.

"Active ETFs: The Revolution Continues" will take place this Wednesday, April 30, at 4 p.m. ET. Visit the Invesco PowerShares website for details on how to sign up. See you there!

Can Actively Managed ETFs Beat the Market?

The actively managed exchange traded fund (ETF) doesn't seem to be turning any heads.

After all, we've heard it all before. First, actively managed mutual funds can be the market. Then, hedge funds can beat the market. And now, ETFs are up to bat.

Ron DeLegge for ETF Guide doesn't sound too impressed, and here is his list of pluses and minuses:

• Pros Active ETFs: ETF product structure is tax efficient; possible lower internal portfolio turnover, compared to an actively managed mutual fund; lower expense ratios than those of mutual funds.
• Cons of Active ETFs: More frequent portfolio disclosure than a mutual fund; higher costs than index ETFs; beating the market over the long run is still an uphill battle; no proven performance track record.

DeLegge says that looking to large-cap companies to beat the market probably won't be successful, as studies have shown that most large-cap fund managers consistently underperform corresponding indexes.

The available actively managed ETFs are:

• Bear Stearns current Yield Fund (YYY)
• PowerShares Active Low Duration Fund (PLK)
• PowerShares Active Mega Cap Fund (PMA)
• PowerShares Active Alpha Q Fund (PQY)
• PowerShares Active Alpha Multi-Cap Fund (PQZ)

Several other providers are waiting their chance to launch their own actively managed funds, including Barclays, State Street, Vanguard and WisdomTree.

More ETFs equal more choices for investors and greater competition between fund providers. Once they're armed with the tools, performance history and knowledge to make a wise decision, investors will ultimately decide if these funds are right for them.

Will the Active ETFs Do a Belly Flop or Fly? You Will Decide

Was the first actively managed exchange traded fund (ETF) a good idea after all? Chuck Jaffe doesn't think so.

The Bear Stearns Current Yield (YYY) debuted on March 25, and it's not going to look any better as the active ETF sector grows, Jaffe says. His problem is not with the fund's troubled namesake, though. He questions whether the fund is going to live up to anyone's expectations.

The fund purchases short-term debt to generate its income in the form of government securities, corporate debt, mortgage-backed and asset-backed securities, municipal bonds, foreign debt obligations and so on. The fund comes with an expense ratio of 0.35%, competitive when compared with the average money market fund expense ratio of 0.47%.

But is it going to deliver superior performance? Jaffe and Jeff Ptak at Morningstar think not: making trades in the fund would erode any expense advantage. One researcher says the fund is not much different than holding cash.

The other recent entrants into the actively managed ETF playing field are:

• PowerShares Active Low Duration Fund (PLK)
• PowerShares Active Mega Cap Fund (PMA)
• PowerShares Active AlphaQ Fund (PQY)
• PowerShares Active Alpha Multi-Cap Fund (PQZ)

Only time will tell with these funds as they build up track records. Investors are watching for performance over time, and if they deliver, perhaps the market will go for this new breed of ETF.

The Actively Managed ETF Is A Kick In The Pants For Mutual Funds

The advent of the actively managed exchange traded fund (ETF) is a kick in the pants for traditional mutual funds, as the market competition for market share will continue to heat up. PowerShares' four actively managed ETFs hit the market last week, and the company, calls this "the most significant industry event since its inception 15 years ago."

Jonathon Chevreau for Wealthy Boomer reports that these ETFs are not purely a stock-picker fund, but each ETF uses some form of active management.  For example the Active Mega-Cap (PMA) and Active Low Duration (PLK) use a quantitative model to select certain blue-chip large cap stocks.

Concerns about a diversion from ETF low expenses and transparency has some watching to see what happens.  And the track record that the managers will have with these ETFs means time will tell of the success with these new ETFs.  If anything, they will up the ante for products within the fund industry, and this will give investors plenty of choices.

PowerShares Launches Its Actively Managed ETF Line

The long-awaited actively managed exchange traded funds (ETFs) from Invesco PowerShares are here. They're billed as the industry's first three actively managed equity ETFs, and they began trading on the NYSE Arca today.

All of the funds' holdings are to be disclosed daily on the fund's website. They are:

• PowerShares Active Low Duration Fund (PLK): Invests in a portfolio of U.S. government, corporate and agency debt securities. It seeks to outperform the Lehman Brothers 1-3 Year U.S. Treasury Index. The unitary fee will be 0.29%.
• PowerShares Active Mega Cap Fund (PMA): Invests primarily in the equity securities of mega-caps. It seeks to outperform the Russell Top 200 Index. The unitary fee will be 0.75%.
• PowerShares Active AlphaQ Fund (PQY): Invests in a portfolio of about 50 securities listed on the Nasdaq Global Market. It seeks to outperform the Nasdaq 100 Index, and the unitary fee will be 0.75%.
• PowerShares Active Alpha Multi-Cap Fund (PQZ): Invests in about 50 securities selected according to a methodology developed by AER advisors. It seeks to outperform the S&P 500. Its unitary fee will be 0.75%.

The unitary fee is the one fee used to cover expenses incurred in connection with managing the portfolio.

Bear Stearns launched the first actively managed ETF in late March, Bear Stearns Current Yield Fund (YYY).

First Actively Managed ETF Off to a Slow Start

Now that the first actively managed exchange traded fund (ETF) has debuted, let's check in with it.

On Tuesday, Bear Stearns (BSC) beat all other providers to market, with its Bear Stearns Current Yield Fund (YYY). On its first day of trading, 26,000 shares changed hands. On Wednesday, things had cooled considerably: 2,600 shares traded. Thursday saw 3,000 shares trade, reports David Wilson for Bloomberg.

One question is whether the drop in trading volume has more to do with a lack of investor interest in actively managed ETFs, or concern about the future of Bear Stearns overall. The question can really only be answered when more active ETFs come to market.

The ETF has $50 million in assets and owns debt with an average maturity of 180 days.

In keeping with the ticker symbol, Wilson has three "whys?" to ask regarding why the firm launched this ETF under current conditions:

• Why did Bear Stearns get to go first?
• Why start a bond fund when equity funds dominate the line-up?
• Why introduce fund that inhibit managers ease of trading habits while they try buy-and-hold strategies? Buy-and-hold can be more rewarding over time due to cost efficiency.

Providers waiting in the wings to launch their own actively managed ETFs include PowerShares, Barclays, State Street, Vanguard, and WisdomTree.

J.P. Morgan Could Inadvertently Find Itself In the Active ETF Game

Bear Stearns Current Yield Fund (YYY), the first actively managed exchange traded fund (ETF) to hit the market, began trading Tuesday.   

If JP Morgan Chase (JPM) takes over Bear Stearns (BSC), the company would enter the $569 billion ETF industry via the Bear Stearns fund, explains Marc Hogan for Ignites. The fund would be re-branded with the J.P. Morgan name, in fact.

Now some are wondering whether J.P. Morgan will jump into the ETF market with both feet once it has its toe firmly in the water. A spokeswoman for the firm says they don't have any plans to launch any and with details of the Bear Stearns takeover still being ironed out, it's been relegated to backburner status. Those big fish are taking up the bulk of the frying pan right now.

No doubt other Wall Street firms are watching the ETF market, and the mutual fund industry seems to be headed in the ETF direction, too.

For now, though, the question is whether the Current Yield Fund will survive at J.P. Morgan. That needs to be answered before anyone can think about adding even more funds into the fold.

The Debate Over the SEC's ETF Rule Changes Is In Full Force

Now that the Securities and Exchange Commission (SEC) has proposed its rules changes for the way exchange traded funds (ETFs) are brought to market, a two-month period for public comment is under way.

Murray Coleman for Index Universe says the proposal was made on March 4 to change two key rules. Industry observers say that several issues could prevent the changes from going into effect anytime soon.

The problem with launching ETFs now, some say, is that the process is redundant and a wasteful use of the SEC's resources. The sponsors don't want to take a ton of time putting together 100-page applications that are cut-and-dried, while the SEC staff doesn't want to read the same thing over and over.

One question is whether the new rules would extend to the new breed of actively managed ETFs, and that's the debate that could hold up the implementation of the rules. The concern is that with active ETFs, people could wind up paying more for ETFs than they should. Without a mandate from the SEC, says one expert, coming up with fair pricing in ETFs is going to become like the next Wild West.

Amid Turmoil, Bear Stearns Launches the First Actively Managed ETF

The race has been won: amid a collapse and a possible buyout, Bear Stearns (BSC) actually found time to launch the first actively managed exchange traded fund (ETF).

The Bear Stearns Current Yield Fund (YYY) began trading today on the American Stock Exchange. The fund is a portfolio of short-term fixed income securities, including U.S. government securities, bank obligations, corporate debt obligations, mortgage-backed and asset-backed securities, municipal obligations, foreign corporate debt obligations, repurchase agreements and reverse repurchase agreements.

Many in the industry were surprised by the launch, says Rob Wherry for Smart Money. When J.P. Morgan's acquisition of Bear Stearns is complete, the fund will be re-branded with the J.P. Morgan name.

The holdings of the fund will be disclosed daily, and the portfolio manager has the discretion to choose securities for the fund.

Now that we've got the first actively managed ETF up and running, it will be interesting to watch and see if investors go for it. If there was any skepticism about an actively managed fund, will the Bear Stearns name on this one hurt it?

Either way, these funds are going to have to show good performance if they're going to attract money. If that happens, start looking for some well-known names to get in on the game, too.

The Actively Managed ETF Premiere Looms Large

PowerShares is officially the unofficial provider of the first actively managed exchange traded fund (ETF), tentatively schedule to hit the market in April. Bear Stearns, for a time, looked like it was going to be first but its woes have taken center stage. 

But it ain't over 'til the fat lady sings. After all, there are other providers who have active ETFs in registration with the Securities and Exchange Commission (SEC), including Vanguard and Barclays Global Investors.

Jane Bryan Quinn for the Washington Post questions whether investors will gravitate toward these new funds. After all, active ETFs will have a manager behind them, which will mean more expenses. And then there's the question of whether these managers will be able to beat the market.

As with other ETF products, it's up to investors to do the legwork when it comes to deciding what's right for them. PowerShares President Bruce Bond believes that when investors decide to compare mutual funds with actively managed ETFs, the new breed of ETFs will come out ahead because they'll be more transparent, tax-friendly and cost-effective.

Bear Stearns' Active ETF? Not Today

As we suspected might happen, the Bear Stearns Current Yield (YYY) exchange traded fund (ETF) will not be launching today. Had the fund gone ahead as planned, it would have been the first actively managed ETF.

The historic moment will have to wait, though, and once again the race to be the first is back on. Matthew Hougan for Index Universe says PowerShares is likely in the pole position at the moment. But we wouldn't count out another provider gearing up to swoop in first, as happened with Bear Stearns.

Bear Stearns is dealing with other, more pressing, issues than being the first to market with this ETF. There's no word on whether it's going to launch at all, in fact.

Now That More ETFs Could Be Available to Mutual Funds, Will They Bite?

Thanks to a proposed rule by the Securities and Exchange Commission (SEC) , it will become easier for mutual funds to invest in exchange traded funds (ETFs). But the question is, will they?

After all, these two have become increasingly fierce competitors over the years as ETFs continue to gather assets and mutual funds lose them.

The current rule is that mutual funds and other investment companies can only acquire 3% of another investment company's shares, says Murray Coleman for Investment News. The proposed rule is expected to go through after a 60-day comment period. Once it does, not only will mutual funds be able to make bigger ETF investments, but ETFs will be able to enter the marketplace more swiftly than they have in the past.

James Pacetti, president of ETF International Associates Inc., says he doesn't see mutual funds biting when it comes to actively managed ETFs. That's because only ETFs that follow a completely transparent index will allow them to know what they're holding at all times.

Hmmm...That's kind of ironic, when you think about it.

Another reason mutual fund managers might not go crazy with the ETFs is that it could raise questions as to what the manager is doing to earn his or her money. Investors might not like paying high fees for what amounts to less work.

The Actively Managed Race Is On: PowerShares Or Bear?

The actively managed exchange traded fund (ETF) race is on, and it couldn't be more heated at this point.

Whenever there is more than one provider gearing up to launch a new product into the marketplace, the competition to be first can be fierce. That's often because investors are excited, and the new ETFs benefit from the pent-up demand.

Murray Coleman for Index Universe reports that while PowerShares was rumored to be in line to launch the first actively managed ETF, a few days later the rumor mill churned out another name: Bear Stearns. 

Bear Stearns' launch date is March 18th, but Coleman says PowerShares President Bruce Bond shouldn't be counted out just yet.

Anything could happen, and the fact of the matter is, we won't know who's first until trading actually begins.

Track Records, Not Intellectual Capital, Will Determine Success of Actively Managed ETFs

Could the proposed Securities and Exchange Commission (SEC) rule that speeds up regulatory approval of index products, including actively managed exchange traded funds (ETFs), reduce the value of a manager's intellectual capital by disclosing portfolio holdings?

Rule 6c-11 will reveal a manager's intellectual capital, however, there is good reason for this requirement. In a way, managers owe clients transparency on what their holdings are, says Robert Ellis for Ignites. Transparency is one of the biggest things that makes an ETF an ETF, and it makes them extremely attractive to investors.

Owen Concannon on Ignites adds that a track record or manager determines an actively managed fund's success. A fund's ability to satisfy its stated objective and build a solid performance track record, and not simply disclosing the holdings, will ultimately measure the value of the intellectual capital.

The SEC approved actively managed funds with the contingency that they disclose their holdings once a day. By disclosing the holdings after any trades have been made, the fund managers prevent any front-running.

Bear Stearns Enters the Active ETF Game on March 18

Bear Stearns is going to launch the first actively managed exchange traded fund (ETF).

The Bear Stearns Current Yield Fund (YYY), or the Triple Y, will be made up of a variety of short-term fixed income instruments. This includes government bonds, municipal securities, bank obligations, corporate and securitized debt. The holdings will be disclosed each day on the fund's website.

The fund begins trading on the American Stock Exchange on March 18.

Actively managed ETFs have been anticipated for years now, and whether they will take off is a matter of debate. The first funds are going to be scrutinized closely by both investors and the industry, and if they can withstand being under the microscope, they just might be embraced.

Don't Expect Active ETFs to Be An Overnight Sensation

Actively managed exchange traded funds (ETFs) have been the talk of the town, however, assets will take time to gather and success will not happen overnight.

The Securities and Exchange Commission (SEC) is closer than ever to approving the launch of active ETFs which would not track a set index. The funds, which have been in the approval process for years, have finally cleared some hurdles and are waiting to be cleared for liftoff, reports John Spence for MarketWatch.

At first launch, active ETFs will be running without a track record, without active managers who are known quantities with advisors and investors.

Active ETFs are a different breed, and they will not track a set index, so investors will be left to put their faith in the managers' stock-picking skills. These new funds will be starting from scratch, and they will have to work to build trust and garner assets.

PowerShares President Bruce Bonds believes that once investors sit down and compare active ETFs with mutual funds, investors will be won over by their transparency (holdings will be disclosed once a day), low cost, tax efficiency and liquidity.

Actively Managed Mutual Funds Make ETFs Look Good By Underperforming

Actively managed mutual fund enthusiasts say that a bear market is where active stock picking can beat index funds or exchange traded funds (ETFs).

Jonathan Chevreau for Financial Post takes a look at the Standard & Poor's Indices Versus Active Funds (SPIVA) scorecard, which seems to indicate that it isn't so. 

Only 24.3% of actively managed Canadian equity funds outperformed the S&P/Toronto Stock Exchange (TSX) composite index in 2007, while only 37% of beat the S&P/TSX Canadian Dividend Aristocrats Index. Out of five years, only 10% of actively managed Canadian equity funds beat the TSX, while over 3 years only 13.3% did so.

Canadian small-mid caps did capture some fame with actively managed stock picking coming out ahead. In 2007, 51.8% of Canadian small-mid-cap equity funds did manage to beat the S&P/TSX Completion Index.

In the United States, it isn't much better: actively managed U.S. and international equity funds also performed poorly against the indexes. Over 5 years, only 13.1% of international equity funds beat the index, while 14.9% of U.S. equity mutual funds did so.

Ouch. If you can't beat the market, why don't you just buy the market?

SEC Gives the Go-Ahead to Speedy ETF Proposal

Well, that was easy: the Securities and Exchange Commission (SEC) unanimously approved a plan to make it easier to bring exchange traded funds (ETFs) to the market.

Under the proposal, reports Judith Burns for the Wall Street Journal, most ETFs could be brought to the market directly. This would save the providers time and money spent getting the okay from the SEC. Currently, ETFs are often held up in the approval process as they await review by SEC staff on a case-by-case basis. The need for specific relief would be eliminated under the plan.

Mutual funds would also be free to make larger investments in ETFs. As it stands, they're restricted from holding more than 3% of another fund's shares. This change also includes restrictions on any excessive layering of fees on investors.

The only ETFs that have been excluded from this plan are those that aren't fully transparent, including actively managed ETFs that don't provide daily holdings information. The SEC is waiting to make a decision on that.

When we spoke last week with John McGuire, partner at Morgan, Lewis & Bockius LLP, he said there are still a few other steps in this process. Now that the SEC has ruled, a period for public comment begins. After that, the regulatory body will make its final review and issue a decision. If the rule goes into effect, the ETF industry likely won't notice the changes until 2009.

Your Mutual Fund Could Be Holding ETFs

Did you know that even if you don't directly invest in an exchange traded fund (ETF), you could still be owning one?

Many traditional mutual funds are investing substantial assets into ETFs. To be clear, these are not the funds of funds that have a direct strategy of investing in other funds. They are actually the actively managed funds that investors pay a manager to hand-pick the stocks, reports Eleanore Laise for The Wall Street Journal.

A number of mutual fund managers are attracted to ETFs because they provide an easy route to put money to work, directly into the market.

Word to the wise: the funds holding ETFs are affecting the fees that you pay because they charge layers of fees with little active management. Check the prospectus, as they are required to list "acquired" fund expenses. Also consider that some funds-within-funds managers are finding the strategy doesn't always pan out as anticipated.

With that in mind, why not save yourself some money and mystery, skip the mutual fund middleman, and invest directly in ETFs?

Burden of Proof Is on Providers for Actively Managed ETFs

Providers of actively managed exchange traded funds (ETFs) will have their work cut out for them as they try to sell them to investors.

The challenge for them, says Marvin Appel for Investment News, will be to retain all the advantages ETFs currently offer while adding more value on top of it. The burden of proof is going to be firmly in their court.

An actively managed international equity ETF could actually be a useful tool, Appel says, because they're more likely to impose trading restrictions on shareholders. If the bid-ask were low, such a fund could actually work.

But overall, Appel says, and we agree: active ETFs are not likely to take the market by storm. However, they give investors more choices, and if it turns out that's what they want, they will continue to get it.

SSGA Files for Line of Target-Date Active ETFs

Now that actively managed exchange traded funds (ETFs) are just around the bend, investors can expect a slew of filings.

State Street Global Advisors on Wednesday filed an application with the Securities and Exchange Commission (SEC) for a series of actively managed target-date ETFs, reports BusinessWire.

The funds will invest in a diversified sampling of equity and fixed-income ETFs.

If this line of funds gets the go-ahead from the SEC, it will join PowerShares' newly-approved set of active funds, which are aiming for an April launch.

Now That Active ETFs Are Here, It's Up to Investors to Bite

Actively managed exchange traded funds (ETFs) are just about here, as the Securities and Exchange Commission (SEC) granted exemptive relief to PowerShares, the first fund provider to receive it.

And PowerShares President Bruce Bonds believes that they'll catch on with investors. There has been criticism of actively managed funds - they defeat the purpose of ETFs, they might not be as cost-effective as ETFs, and so on. But Bonds says that when investors finally sit down to compare actively managed funds with mutual funds, the transparency of the active ETFs, their liquidity and tax efficiency will ultimately win them over.

Will they someday take the place of mutual funds? Not quite, Bonds says, but he believes that they will certainly give mutual funds a run for their money. Mutual funds will continue to pull in assets, but ETFs will remain a strong challenger.

The funds may or may not change their holdings each day, depending on what the markets are doing. Whether they do or not, whatever holdings there are will be disclosed each evening. Bonds says this is an effort to preserve transparency, and was a condition of the SEC's granting of the relief. By disclosing holdings at the end of the day, any possible front-running that might take place will be discouraged.

The four funds are:

• PowerShares Active AlphaQ Fund: seeks to provide long-term capital appreciation by investing in a portfolio of 50 Nasdaq-listed securities. It's designed to beat the Nasdaq 100 benchmark.

• PowerShares Active Alpha MultiCap Fund: Designed to achieve returns in excess of the S&P 500 with a portfolio of 50 securities.

• PowerShares Active Mega-Cap Fund: Seeks to primarily invest in mega-caps and outperform its benchmark, the Russell Top 200.

• PowerShares Active Low Duration Fund: Invests in a portfolio of U.S. government and corporate bonds, and seeks to outperform its benchmark, the Lehman Brothers 1-3 Year US Treasury Index.

Now that they've gotten the go-ahead, the waiting game begins. Bonds says that PowerShares is aiming for an April launch.

Keep an eye out. This new breed of ETF has been long-awaited, and it's just the beginning. Are investors going to bite?

 

Rumors of Target-Date ETFs' Demise Have Been Greatly Exaggerated

Let's get this straight: No target-date exchange traded funds (ETFs) are closing.

However, portfolio provider XTF Advisors is shutting down its lineup of target-date ETF portfolios.

Since Claymore's announcement that it's booting 11 of its weakest-performing ETFs, you'll forgive the alarm these days when investors see "closing" and "ETFs" in the same sentence.

We repeat: No other ETFs are actually closing this time.

"No animals have been injured in this movie," says Jeffrey Feldman, chairman of XShares. XShares has nothing to do with XTF, but somehow in the spreading of the news, their similar-sounding names were linked. XShares currently offers the only target-date ETFs in the marketplace through its line of TDAX products.

Feldman set the record straight: "They went out of business for reasons totally unrelated to ETFs. There was an inability to raise capital. They had a very good business model, but they never built or managed ETFs."

Meanwhile, State Street Global Advisors filed with the Securities and Exchange Commission (SEC) to launch a series of actively managed target-date ETFs, reports Stacy Schultz for On Wall Street. They're going to be a "fund of funds" and hold other ETFs, according to Matthew Hougan for Index Universe.

The XShares line consists of ETFs of stocks and bonds - analogous but different products, Feldman says.

They're Here: the First Batch of Actively Managed ETFs

A new era of exchange traded funds (ETFs) is here: PowerShares got the go-ahead from the Securities and Exchange Commission (SEC) for an actively managed fund.

Make that four of them. The anticipated names, according to PowerShares, are:

• PowerShares Active AlphaQ Fund: seeks to provide long-term capital appreciation by investing in a portfolio of 50 Nasdaq-listed securities. It's designed to beat the Nasdaq 100 benchmark.

• PowerShares Active Alpha MultiCap Fund: Designed to achieve returns in excess of the S&P 500 with a portfolio of 50 securities.

• PowerShares Active Mega-Cap Fund: Seeks to primarily invest in mega-caps and outperform its benchmark, the Russell Top 200.

• PowerShares Active Low Duration Fund: Invests in a portfolio of U.S. government and corporate bonds, and seeks to outperform its benchmark, the Lehman Brothers 1-3 Year US Treasury Index.

The holdings of each fund will be disclosed daily on the PowerShares website. Transparency had been a key issue that held up the approval of actively managed funds.

Investors Growing and Evolving Along With ETF Industry

State Street Global Advisors' Tony Rochte is the head of the firm's exchange traded fund (ETF) distribution. He's got a few thoughts on the current state of the ETF industry.

As ETFs make gains on mutual funds and actively managed ETFs loom, many investors and industry professionals must be wondering where we are now, and where we're all headed.

Rochte sees ETFs as a complement to other investment tools, not a replacement. He also views the 401(k) market as a critical point to the success of the industry. He feels the biggest growth segment for ETFs has been the intermediary or advisor market.

Jesse Emspak for Investors Business Daily reports that Rochte thinks institutions are also continuing to grow their ETF adoption, adding to their proliferation. ETF issuers need to focus more on fixed-income ETFs, as that has so far been an underrepresented area of the market.

Rochte's four caveats for investors?

1. Make sure you understand the sponsor
2. Understand the index that you are buying and what it is based on
3. Make sure when you buy it is with good execution through a brokerage window
4. Do not chase performance; always work with an advisor.

Ultimately, Market Forces Will Decide Where Active ETFs Go

Since 2001, the Securities and Exchange Commission (SEC) has been considering the actively managed exchange traded fund (ETF).

Slow-forward seven years, and the SEC is now comfortable with the concept. But in the end, the markets will decide if the concept is right, says W. John McGuire for Ignites. The SEC moved forward with these ETFs after determining that transparency is more critical than whether an ETF tracks an index.

Final approval hinges on a public review process, however, and if no hearing is requested by 5:30 p.m. on Feb. 26, actively managed ETFs will likely hit the market.

Each morning, the ETF will disclose its holdings, giving market participants the opportunity to monitor the value of the securities and compare them to the market price of ETF shares. If there's a difference, market forces will bring the ETF share price back to the net asset value (NAV) of the underlying securities.

What if the SEC decides that an ETF that isn't transparent is okay? The market would likely say that it's not okay at all. After all, transparency is one of the most attractive features of an ETF, and if that doesn't exist, what's the point?

What Stands Between Active ETFs and Their Launch? You.

Exchange traded fund (ETF) provider PowerShares has been given the green light to launch the first group of actively managed funds.

But there's a catch, reports Murray Coleman for Index Universe. The Securities and Exchange Commission (SEC) is hinging final approval on a public review process. This happened several years ago, and the public's disapproval kiboshed any actively managed ETF from hitting the market.

So, here we are again.

The deadline for submitting a request for a public hearing is 5:30 p.m. on Feb. 26. If no hearing is requested, active ETFs will be hitting the market.

Actively Managed ETFs vs. Regular ETFs

In our recent post on actively managed exchange traded funds (ETFs) being closer to a reality than ever before, reader Marketworth wanted to know the difference between an actively managed ETF and a traditional one.

We're here to help.

Traditional ETFs track underlying indexes, which for the most part, don't change a whole lot. In some, there is quarterly rebalancing, while in others, the components are changed once every few years (as in the Dow Jones industrial average). It's known as passive management: investors are not trying to beat the market, they're just playing alongside it.

It's a reason ETFs are relatively cheap when compared with mutual funds; there's no need for a manager to move things around. With an index, you more or less can set it and forget it and you always know what you own.

Actively managed ETFs operate more like mutual funds. Behind them, instead of an index, will be a manager who will be doing the research, then picking and choosing securities based on the findings. That manager isn't working for free, either, and the fees are passed on to the investor.

But, wait. What does that do for the cost of these funds and the transparency?

The answer is that it remains to be seen. The transparency issue in particular has been a big concern of the Securities and Exchange Commission (SEC). If there's a fund manager doing the homework and actively managed ETFs are totally transparent, there's nothing to stop investors from playing along. The prices of those securities could be affected, and they would get the benefits of the manager's research without the cost.

One solution that's been offered is to release daily holding information, as opposed to mutual funds, which report their holdings typically either monthly or quarterly.

Another key difference between active ETFs and mutual funds is the way they trade. Mutual funds trade once a day, at the end of the day. All ETFs can trade at any time, just like stocks.

Mutual Funds Finding ETFs Harder to Ignore

How long can mutual funds hold back the rising tide of exchange traded funds (ETFs)?

Now that actively managed ETFs are closer to reality, Kevin Burke for Ignites says that mutual fund companies are going to find ETFs much more difficult to ignore than before. In fact, the industry's largest trade group, the Investment Company Institute, formed a permanent ETF committee. It's another sign that ETFs are encroaching on mutual fund turf.

Some companies have joined forces with ETF providers: Invesco bought PowerShares in 2006. Dreyfus entered a co-branding partnership with WisdomTree. An anonymous Merrill Lynch branch manager says a lot of their advisors are using them "in a big way."

But other companies are standing firm: American Funds is said to not be likely to make a move into ETFs anytime soon.

A survey by Cogent revealed that 95% of advisors say they'd be interested in selling actively managed ETFs. But 47% of advisors say they will never sell ETFs, a number that's attributed to a large number of aging advisors who may be resistant to change.

It remains to be seen if mutual funds will embrace actively managed ETFs, and advisors are keeping an eye on the asking price as well as methods of disclosure. If they catch on, it could set off a sea change in the industry.

No Such Thing as a Free Lunch, Even with Active ETFs

Actively managed exchange traded funds (ETFs) are just around the bend. But the old adage "You've got to give something to get something" holds true with them.

Ian Salisbury for the Wall Street Journal notes a few things that could fall by the wayside when these funds finally hit:

• You'll give up indexing. Actively managed funds will have a broader mandate that will make it possible for fund managers to pick attractive stocks while attempting to outperform the market.
• You'll likely give up rock-bottom prices. One reason ETFs are so inexpensive is because they are passively managed, meaning you aren't paying a manager to do your stock picking for you.
• You might be saying goodbye to tax advantages. ETFs avoid forcing investors to pay taxes until they sell fund shares because they rarely trade and they can turn over shares they own without actually selling them, eliminating potential capital gains. While active ETFs might be more tax-friendly than conventional mutual funds, but they're still likely to trade more often.
• You might have to wait until they catch on. Until active ETFs gain popularity, they could be thinly traded, making them expensive to buy and sell.

We feel that investors have to give up a lot, and many of these things are what make ETFs so great in the first place. We're betting that after looking into it, investors will see actively managed funds the same way.

Actively Managed ETFs Inch Closer to Reality

The Securities and Exchange Commission (SEC) has cleared another step in the path to an actively managed exchange traded fund (ETF).

On Friday, reports Diya Gullapalli for the Wall Street Journal, gave "close-to-final" approval to Invesco Ltd.'s PowerShares Capital Management unit to take a "mix-and-match" approach to investing. That is, buying securities actively picked by a money manager as opposed to simply tracking an index as traditional ETFs do.

Barclays Global Investors and Bear Stearns, who also have actively managed funds in registration, are expected to get similar notices as early as today.

Final approval will take a few more steps, but the bottom line is that the new funds could begin trading in as little as a month.

ETFs Gaining Market Share

Exchange traded funds (ETFs) are closing in on their counterparts, the actively-managed mutual fund and the hedge fund.

Experts are reporting that the global market for ETFs will grow to $2 trillion in 2011 from the current $800 billion. Bloomberg's Michael R.Sesit reports that the forecast says a lot about one of the world's fastest-growing asset classes and this is significant because ETFs pose a threat to the global fund industry.

ETFs have lower expense ratios, a growing number of thematic and specialty funds, and can trade throughout the day like a stock. They're attracting flows that would otherwise end up in an actively managed mutual fund or hedge fund. It is not clear whether ETFs are attracting money withdrawn from active funds, but they are without a doubt capturing more of the inflows.

ETFs Are On the Front Burner

The Securities and Exchange Commission (SEC) is putting exchange traded funds (ETFs) on the front burner.

At a San Diego conference recently, says Joe Morris for Dow Jones Newswires, Andrew Donohue said that faster ETF approval and actively managed ETFs are top priorities. He has also mentioned rules changes that could prove to be beneficial to ETFs.

Donohue hopes the suggested changes will exempt sponsors of ETFs from having to get relief from parts of federal securities laws or rules before funds are offered. His plan for active ETFs would involve disclosing their portfolio holdings on a daily basis.

Potential Rule Changes Could Benefit ETFs

Exchange traded funds (ETFs) could benefit from a proposed new set of rules from mutual fund industry regulators. Andrew Donohue of the Securities and Exchange Commission (SEC) said he hoped to address changes to 12b-1 fees, used for marketing and distribution expenses.

Judith Burns for Dow Jones NewsWires reports that the changes to the fees would cut down on printed information provided by the fund companies, which would have the added benefit of saving trees.

The proposed rules could expand the number of ETFs available. Donohue wants to propose a rule that would allow the funds to be offered without requiring sponsors to obtain relief from parts of U.S. securities laws or rules. He said regulators don't want to "micromanage" ETFs.

Donohue also hinted that the SEC's approval of actively managed ETFs could be coming soon.

Active Fund Managers Losing To ETFs

The index-based and exchange traded fund (ETF) community are a threat to active management-based investment products.

Active managers stand to lose $12 billion a year in potential management fees, and hedge fund replication strategies also can cost these managers because of lost management and performance fees, reports Martin Rabkin for Centre Daily. At the moment in the United States, $1 trillion is invested in index-based products, including ETFs.

Investment performance measurement has undergone a transformation. Instead of comparing a manager's returns against a broader market index or ranking the performance of two similar funds against one another, the process has become more concise. For that reason, it will be increasingly tough to stem the tide of indexing as investors demand more transparency and lower cost - two huge advantages of ETFs.

ETFs or MFS? That Is The Question

An advocate of actively managed mutual funds invested in two exchange traded funds (ETFs) and now lives to talk about the experience.

Remember, this is a skeptic's point-of-view, reported by Murray Coleman on Seeking Alpha. In a nutshell, his complaints are that there are too many traders, too many ETFs and they're too new. An ETF is a creative innovation intended for giving individual traders an advantage, however, if insiders like John Bogle or William Bernstein remain weary, why shouldn't this investor remain so?

Going into what is not familiar and unknown is a hard thing to do, but it is the way that you can learn and benefit. If nothing else, by investing in these ETFs and taking the time to become educated about them, he will become a better investor. As one of his mentors put it: "There's more than one path leading to Dublin."

WisdomTree Could Launch Money Market ETFs

WisdomTree filed for 12 new money market exchange traded funds (ETFs) to cover 17 different foreign and emerging markets. The new funds are similar to the Rydex CurrencyShares funds with two major differences:  (1) They cover many new global markets, and (2) They are money market funds.

Murray Coleman for Index Universe on Seeking Alpha reports that the total number of currency funds available will be 17, representing currencies from almost every major market in the world. Several currencies will be accessible by investors for the first time, including the Brazilian real, Chinese yuan and the South African rand.

Another addition from WisdomTree includes the WisdomTree Developing Markets Fund which proposes to make short-term investments in money market instruments from 10 emerging markets: Brazil, Chile, China, Czech Republic, Hungary, India, Poland, South Korea, Taiwan, and Turkey. This fund is also being titled actively managed, with an average maturity of around 60-90 days.

This will allow investors to put their money in an investment outside the U.S. in a liquid and safe environment.

Read the disclosure, as Tom Lydon is a board member of Rydex Investments.

Active ETFs - Is There Enough Demand?

The exchange traded fund (ETF) industry is raving about the actively managed fund premiering, but it appears most of the raving is from potential issuers.

A conference sponsored by Index Publications and Financial Advisor Magazine previewed the enthusiasm and it was on behalf of most providers. Many of the financial planners in attendance indicated an actively managed ETF would be a product that still needs a market, reports Lawrence Carrel for TheStreet.

Until this point, all of the products available in the United States have passively tracked an index much like a traditional mutual fund does. Active management has been a new way to bank on new investors and compete with the mutual fund industry.

Most insiders feel that an actively managed ETF is the next step for the business and that they are inevitable. The good side for investors is that they will carry lower expenses than a mutual fund, and traditional indexes will remain the core. Time is the key so that many can judge by performance.

Picking And Choosing From All The ETFs

With a total of 612 exchange traded funds (ETFs) sponsored by 19 managers, how do you choose among them?

Because ETFs track an index passively, past performance is not useful. Michael Maiello for Forbes reports that their "Best Buys" are the ETFs that have the lowest costs in each of the seven categories. Cost is defined as the sum of annual expenses and one-fifth the average bid/ask spread observed on a recent trading day.

An ETF has a rigid portfolio mix and it trades with a bid/ask spread on a stock exchange, so when you buy or sell them, a brokerage commission is run-up. Shares are created and redeemed in response to demand.

Lately, ETF managers have hired companies such as S&P and Zacks to come up with custom indexes for them. Some of these have been successful and haven't slipped, such as the Intellidexes for PowerShares.

Other ETF landmarks taking place now: pending Security and Exchange Commission (SEC) approval, an actively managed ETF could be coming soon. ETFs that invest in commodities are proliferating, too. Oil and gold are in high demand, thanks to their ease. Yesterday, Market Vectors Coal (KOL) launched, giving investors access to yet another area.

The Year Of the Actively Managed ETF?

A new listing for an actively managed exchange traded fund (ETF) was filed last week, making 2008 the year investors may get to invest in one. AdvisorShares Investments filed with the Securities and Exchange Commission (SEC) for an two actively managed ETFs: a sector allocation ETF and a country allocation ETF, reports David Hoffman for InvestmentNews.

We are getting much closer to an actively managed ETF. Where index-based ETFs don't necessarily need to have a track record because investors can just look at the record of the underlying index, actively managed ETFs will have to prove that they can add value. Some industry experts thin the actively managed ETF will be a harder sell than the index-based funds that are already trading.

ETFs Growing in Their Complexity

Exchange traded funds (ETFs) are becoming more popular and as this happens, they are becoming more complex.

The line between the 15-year old industry and mutual funds is blurring as providers are jockeying to register the first truly actively managed ETF, says Stan Choe for the Associated Press. Such ETFs may beat their benchmarks, but with higher expenses - like a mutual fund. Another problem facing providers is the update of holdings. Mutual funds update quarterly, and some ETF providers are willing to disclose these daily, however, another fund manager can mimic a funds moves this way.

When actively managed ETFs hit the market, they're going to hit with a great big thud. Most investors look to ETFs to simply track a market or sector, and they don't want a manager doing their research for them.

Fidelity is Showing Some Vigor, but What Does It Mean for ETFs?

It appears there are definite signs of life over at Fidelity Investments, the mutual fund giant that has so far resisted throwing itself fully into the exchange traded fund (ETF) arena.

Last year, many of the company's trademark funds went from lagging to leading. This may not be enough to make up for lost time over the past several years, reports Suzanne McGee for Barron's but it does help. The average annual return was at 12.7% annually compared to 12.82% for the S&P. Some insiders believe this is the start of a golden turnaround for the mutual fund specialists. Veteran managers like Harry Lange and Will Danoff, along with newbie Jason Weiner, are on board and ready to relive the mega status by posting the returns they earned in the 1970s-mid 1990s.

The big question is, will investors respond to the improvements in research and management and get back into funds they've abandoned in recent years? Or will investors write off mutual funds for good and stick with ETFs?

It's going to get interesting.

Survival of the Fittest ETF

The exchange traded fund (ETF) industry is buzzing with talk about "second-generation ETFs." These are funds that are actively managed by a money manager instead of the original passive ETFs. 

Diya Gullapalli for The Wall Street Journal explains that 2007 had plenty of bumps in the road for the young industry, making it tough for smaller companies to start up and take off with their ETF families. Factor in the oil craziness, the zig-zagging market and talk of a recession and it's not difficult to see why.

The first actively managed ETFs could launch as early as the first quarter this year, and providers are awaiting approval from the Securities and Exchange Commission (SEC). Although the environment is touch and go for some of the smaller fund providers, of the ETFs available at the moment, 40% were last year alone. The added competition could also be making the environment tougher to survive, which is great for investors. It ups the ante for providers to supply a good product with lower fees.

Actively Managed ETF: The Race Is On

Despite the obstacles, exchange traded fund (ETF) providers are on a mission to make stock picking expertise available through these funds. An actively managed ETF will be the main push on providers' lists in 2008, as many are jockeying to be the first to market.

Meanwhile, the American Stock Exchange has taken steps to be the first to list the first actively managed ETF, reports Lawrence Carrel for TheStreet.com. Whichever firm is the first to launch one will also be entitled to bragging rights and the first pass at mainline mutual fund investors.

Besides the technicalities involved with launching an actively managed ETF, there are concerns that freely picking stocks could undermine their transparency, which is a key selling point of traditional ETFs. Low cost is another advantage of ETFs, but active trading eats into returns because trading costs add up.

2008 should be a landmark year for the advent of these active funds. But for right now, providers are just trying to formulate a fund that would pass muster with the Securities and Exchange Commission (SEC).