David Hoffman and Evan Cooper for Investment News report on how certain industry insiders feel about non-traditional ETFs in portfolios. The excellent and informative full webcast can be viewed in Investment News’s archives.

On leveraged and inverse ETFs in general:

John Carr of Carr Schwartz Butterfield: The leveraged funds are on the radar of FINRA, the SEC and many states, so advisors are required to document the performance of the ETF, and prove how the funds are helping out a client’s portfolio. It is up to the advisor to prove why the ETF is suitable and necessary for their clients.

Kathleen Moriarty of Katten Muchin Rosenman: I would really encourage potential investors to at least read the summary portions of the prospectus, because in all of the leveraged and ETF prospectuses now, they give actual examples, either in the front part of the prospectus or in the back, of how the mechanism works. Half of the problem comes from people not understanding how the investment works.

On these ETFs and whether their performance meets expectations:

Paul Schatz, president and CEO of Heritage Capital: For the most part, yes. However, if you really dial down to the double- and triple-leveraged funds, both the long and the shorts got hammered last year because of the compounding effect.

Paul Simon, chief investment officer at Tactical Allocation Group: When you’re going to a two- or three-X, whether it’s an inverse or a leveraged situation with one of these ETFs, they’re inherently going to be more volatile. But in a situation like the last 18 months, where volatility was unprecedented, its a bad mix. It’s the main reason to do your homework, and to be careful. (Do leveraged ETFs actually belong in your portfolio?)

On active ETFs:

Ms. Moriarty: There is no true active ETF yet. And in order to understand this, you need to know a three-second background on how the ETFs started. Basically, the ETFs are very odd kind of mutual fund. The real Holy Grail is to do a non-disclosed actively managed fund. And there are about six different ideas of how to do this. They have been down at the SEC pending review for about two to three years, and I don’t know how much longer that’s going to take. (Will the demad for active management in ETFs grow to mainstream?)

For more stories about active ETFs or leveraged ETFs, visit their respective category pages.

Passive ETFs have paved the way for the active ETF industry, and now big-name brands such as Vanguard, PIMCO, Grail Advisors, Claymore and State Street Global Advisors are getting in on the action, writes Lisa Smith for Investopedia. (What else is planned for these ETFs?)

A range of active strategies can be purchased as a standalone product or mixed and matched to form a portfolio. This will also allow investors the option of choosing between ETFs in passive management, active management or a both.

Active ETFs offers the advantages of mutual funds, such as professional management and low-cost entry, and investors won’t need to personally handle stock selection, trading and performance tracking. ETFs also have the innate perk of lower expense ratios, better tax advantages, trading flexibility and transparency.

Potential investors should note that the growing interest in active ETFs may raise concerns regarding tax efficiency and costs. Active ETFs will reduce tax efficiency and increase costs as the number of trades increase.

For more information on actively managed ETFs, visit our actively managed cateogry. Among the growing number of actively managed ETFs on the market now include:

• Grail American Beacon Large Value (NYSEArca: GVT) is up 4.4% in the last month

• PowerShares Active AlphaQ (NYSEArca: PQY) is up 3.7% in the last month

Max Chen contributed to this article.

Grail Advisors

The two ETFs would be sub advised by McDonnell Investment Management LLC. David Hoffman for Investment News reports that the new ETFs are:

• Grail McDonnell Intermediate Muni Bond ETF
• Grail McDonnell Core Taxable Bond ETF

This filing comes on the heels of Grail’s launch of four active equity ETFs:

• RP Growth (NYSEArca: RPX)
  
• RP Focused Large Cap Growth (NYSEArca: RWG)
• RP Technology (NYSEArca: RPQ)
• RP Financials (NYSEArca: RFF)

Read our interview from earlier this year with Grail’s CEO William Thomas here.

Currently, Grail offers five actively managed ETFs.

For more stories about new ETFs, visit our new ETF category.

Grail Advisors is giving traditional mutual funds a run for their money, with the launch of  a new line of actively managed ETFs. New York-based RiverPark Advisors, assisted by Wedgewood Partners, will do the day-to-day stock selection. RiverPark’s involvement is notable because the firm’s principals are veterans of the traditional mutual-fund industry, hailing from Baron Funds, explains Eleanore Laise for The Wall Street Journal.

The new ETFs are:

• RP Growth (NYSEArca: RPX)
  
• RP Focused Large Cap Growth (NYSEArca: RWG)
• RP Technology (NYSEArca: RPQ)
• RP Financials (NYSEArca: RFF)

A actively managed ETF can offer many benefits to investors such as tax efficiency, lower costs, and full disclosure of what the fund owns, at any time of day. Garnering assets for the actively managed ETFs has proved to  be tough, however, as the market conditions and lack of investor education may be contributing, reports Joe Morris of Ignites. Nonetheless, Grail is planning to roll out 24-30 actively managed ETFs over the next year or so.

For more stories about New ETFs, visit our new ETF category.

HS Dent Publishing is a research firm that analyzes demographic trends and how people spend money as they move through various life changes, and then how that spending impacts the overall economy.

That’s the basis of a new ETF from AdvisorShares: the Dent Tactical ETF (DENT), the first actively managed ETF of ETFs. While no market is off limits, Johnson says they’re more interested in emerging areas with a lot of internal growth such as India, China and Taiwan.

“Personal consumption is a big part of any economy,” says HS Dent President Rodney Johnson. “If you can forecast what they’ll buy next you can get a sense of areas that might grow.”

HS Dent already runs a fund based on the concept, and it contains a number of Pacific Rim emerging markets.

Noah Hamman, AdvisorShares’ CEO, says depending on how a financial professional manages money, the fund can be used as a core alternative, but because it is tactically managed, it could also be viewed as a satellite alternative allocation.

It’s what consumers do with their money that suggest where an economy is headed. “When you’re young, you spend,” Johnson says. Young families with young children buy throughout the duration of a child’s time at home. After the children leave, families continue to work and maintain their focus on paying down debt.

“If you can track people who go through these stages of life, you can see how the economy will change,” Johnson says.

In the United States, a fundamental change is on the horizon. Baby boomers are going to shift from being net spenders to net savers, thus pulling money out of the economy, Johnson notes.

Transparency seems to be one of the bigger questions hanging over the heads of actively managed ETF providers, but Johnson and Hamman aren’t concerned with it. For one, rebalancing in the fund will be done as the portfolio manager sees opportunities in different markets, asset classes, sectors or countries. For another, he says, people who are going to shadow you will do it no matter what, although most people aren’t going to bother.

Harry Dent is known in some circles as “The Sage of Doom and Gloom,” but Johnson and Hamman dispute that. “We are trend people, and we follow long-term trends that show themselves. We don’t say that the economy will never come back, ” says Johnson.

The Dent Tactical ETF will come with a gross expense ratio of 1.56% with estimated operational fund expenses and underlying ETF fees – admittedly higher-priced than most index-based ETFs, but “very, very competitive with most mutual funds.” The management fee is 0.95%.

According to its prospectus filed with the SEC, the investment focus of WCM/BNY Mellon Focused Growth ADR ETF (AADR) will include of investing in industry-leading non-U.S. organizations, led by visionary management teams with sound business strategies.

Additionally, the fund’s investment objective is long-term capital appreciation above international benchmarks such as The Bank of New York Mellon Classic ADR Index, the MSCI EAFE Index and MSCI EAFE Growth Index.

It will be one of the few actively managed ETFs, utilizing WCM Investment Management, as an investment sub-advisor, and thus does not seek to replicate the performance of a specified index.  An actively managed ETF uses an active investment strategy to meet its investment objective.

The second ETF it plans to launch is the Legacy Long/Short ETF (HDGE). The fund is a “fund of funds,” which means that the fund seeks to achieve its investment objective by investing primarily in other ETFs that each track the performance of a securities index and shares of certain exchange-traded products.

For more stories on new ETFs, visit out new ETF category.

Kevin Grewal contributed to this article.

Allianz’s Pacific Investment Management Co. (PIMCO) says that TIPs often lead to missed opportunities and hidden costs, reports Ian Salisbury for The Wall Street Journal. TIPs adjust their principal to match rising prices, or in other words, they are Treasury bonds that hedge against inflation.

TIPs have rallied this year on worries over inflation, which could arise as a result of the copious government stimulus efforts. PIMCO has filed with the Securities and Exchange Commission (SEC) to launch TIPs-related ETFs in an attempt to get in on the investor interest, and all four would be index funds.

PIMCO’s paper, written by John Cavalieri, Gang Hu and Mihir Worah, points out four areas of inefficiency in the TIPS market that could be corrected through proper management during specific segments of the year or changes in the shape in the yield curve:

• Passive investors can incur larger transaction fees than active investors in the TIPs market, and passive investors won’t be able to time transactions during the day to take advantage of market imbalances that could occur at the end of the day.
• TIPs ETFs rebalance periodically and active investors can capture alpha by purchasing securities at artificially depressed prices after rebalancing.
• TIPs auctions create market inefficiencies. The funds can lose out on a chance to trade in periods when supply and demand are out of whack.
• TIPs prices also shift according to the seasonal patterns in the underlying inflation index.

Vanguard agrees with this assessment and is in favor of active management in TIPs funds. Barclays, however, dismissed Pimco’s findings, stating that ETFs trade less frequently than active funds, which lowers costs. Furthermore, Barclay insists that costs incurred are easier to judge since they are rolled into bid-and-ask spreads that investors see upon trades.

According to Robert Huebscher for Advisor Perspectives, active managers won’t be able to outperform the passive TIPs ETF in net fees, and in an attempt to outperform passive funds, active managers will also be more inclined to take excessive risks. Huebscher also notes that PIMCO may be more biased toward active management since a major chunk of the company’s revenue comes from actively managed bond portfolios.

• SPDR Barclays Capital TIPS (IPE): up 6.3% year-to-date

• iShares Lehman TIPS Bond (TIP): up 5% year-to-date

For more information on Treasury inflation protected securities, visit our TIPs category.

Max Chen contributed to this article.

PIMCO

The filing comes not long after Pacific Investment Management Co. launched its first ETF, the PIMCO 1-3 Year U.S. Treasury Index Fund (TUZ). Product Manager Don Suskind and Managing Director Tammie Arnold say that so far TUZ appears to be doing very well. The fund currently has about $45 million in assets since its launch early last month.

“We feel really good about our first ETF, and we’re happy with the raise-up of assets,” Arnold says.

Arnold and Suskind also note that PIMCO is taking a long-term view of the bond market with the goal of building a full suite of ETFs for investors to choose from. A slew of filings are awaiting the go-ahead.

Sree Vidya Bhaktavatsalam for Bloomberg reports that PIMCO will offer five ETFs in which the components are selected by portfolio managers, according to a registration statement filed with the Securities and Exchange Commission (SEC).

According to the filing, three will focus on debt maturing in less than one year and two will focus on municipal bonds. In addition to this filing, PIMCO is also looking to launch six other passive funds.

Pimco also plans to use their bond expertise to compete in the industry formerly led by Barclays Global Investors (soon to be owned by BlackRock) and State Street.

PIMCO is also evaluating some of its other strategies to see if they’d be appropriate in ETFs.

For more stories about new ETFs, visit our new ETF category.

Where ETFs Are Now

During the first four months of the year, net sales for mutual funds dropped $5 billion while ETFs experienced net inflows of $7.6 billion, says Joseph Keenan, Managing Director and Head of Relationship Management for BNY Mellon Asset Servicing, in webinar titled Pressures and Potentials in the ETF Market. Several leaders in the ETF industry gathered at the webinar to talk about the latest trends they’ve seen.

Asset Allocation Out, Active Management In?

Bill Thomas, chief executive officer at Grail Advisors, sees investors have been hit hard as asset allocation/diversification failed across the board, and now people are coming back to the markets with different strategies and styles. The market turnaround could be the opportunity for ETFs to shine. He also thinks that value will be leading the recovery, with small-cap firms doing well, then work its way up to large-caps.

Thomas notes that investors may see the benefits of an actively managed strategy in ETFs rather than focus on track records. He also feels that having proven money managers running the funds will be to their benefit.

Bruce Bond, president of PowerShares, says the savings rate, which is up as retail investors become cautious, could hinder the economy. Investors need to take advantage of different opportunities and they can’t rely on the set-it-and-forget-it strategy. ETFs could come out strong because of the lure of transparency, low costs, liquidity and new tax implications. Not to mention hedge fund strategies or tactical long/short strategies and commodity-focused ETFs that are now available to retail investors.

Leveraged ETFs

Dan O’Neill, President/Chief Investment Officer at Direxion Funds, says the success of Direxion is because its leveraged funds allow investors access to an “athletic set of tools.” But a potential trader should monitor these type of funds very frequently and be educated about the ramifications of using these types of leveraged funds. O’Neill stresses that they are not meant for everyone.

Thoughts on John Bogle

The webinar addressed the words of dissent about ETFs, particularly from John Bogle, who recently did a study showing that investors generally make poor decisions when buying and selling them. O’Neill notes that Bogle’s study didn’t account for investors who were shorting or hedging, and that he knows many people are actually using ETFs very constructively.

Max Chen contributed to this article.

Russell Investments

Russell has filed with the Securities and Exchange Commission (SEC) for exemptions in an effort to enter into the actively managed ETF segment of the industry. Some of the many exemptions include allowing funds of funds operated by Russell to buy shares of the ETFs in amounts beyond what is normally allowed under SEC guidelines and allowing ETFs launched by Russell to use the firm’s own indexes, according to Index Universe.

Russell is seeking to create index-based ETFs, as well.

Some of the other requests in the filing include:

• The funds could cover domestic stocks, international stocks or fixed income
• The holdings of each fund for the prior day, whether passive or actively managed, will be made available on a daily basis
• Basic operation of ETFs

So far this year we’ve seen a number of new and old names file for actively managed ETFs. Allianz, Claymore, State Street and Vanguard have all sought the OK from the SEC. BlackRock may dive in, and Grail Advisors launched their first active ETF earlier this year.

For more stories on actively managed ETFs, visit our actively managed cateogry.