ETFs that center on active management are expected to be the hot trend in 2010. Analysts project that about 100 new funds could launch, adding to the few that are trading on the market today. Elizabeth Trotta for SmartMoney reports that with active ETFs, managers tactically manage a basket of stocks. Critics say that means investors also have to stay alert and closely eye the funds they own. [Hurdles Facing Actively Managed ETFs.]

Proponents say that actively managed ETFs make sense when you consider how mutual funds operate. Active ETFs have all the benefits of an active mutual fund – primarily the expertise of a manager working behind it – without the drawbacks. Mutual funds aren’t transparent, tend to cost more than ETFs and can’t be traded intraday.

Investors are watching and waiting to see if these managers can generate alpha before they hop on board. If the managers working behind these funds can do it, the investors will come.’

There will be no shortage of high-quality products, though. Grail Advisors, PowerShares and PIMCO have all launched quality actively managed ETFs in recent years and more big names are in the pipeline. These includ Hancock, Vanguard, Grail, T. Rowe Price and Legg Mason. With those kinds of names standing behind these products, investors might find them to be an irresistible lure. [Active Management Opportunities.]

For more stories about active management, visit our actively managed ETF category.

Legg Mason, based in Baltimore, has filed with the SEC to launch active ETFs. According to a spokeswoman, Legg intends to offer stock and bond ETFs that implement active strategies in an attempt to outperform their benchmarks, says Eileen Ambrose for The Baltimore Sun.

With fewer than a couple dozen actively managed ETFs on the market, the market share is wide open and ready for the taking. It’s a waiting game right now: actively managed ETFs are still waiting for an influx of assets, and investors are waiting to see if these funds can consistently generate alpha. If they can, they’ll come calling. [Opportunities for Actively Managed ETFs.]

Legg is the latest in a growing list of household names that are looking to launch active ETFs. T. Rowe Price, Goldman, Putnam and TD Ameritrade have all expressed an interest. [Grail Advisors: Leading the Charge.]

For more stories about actively managed ETFs, visit our actively managed ETFs category.

Actively managed ETF provider Grail Advisors recently added two more funds to their lineup: Grail McDonnell Intermediate Municipal Bond ETF (NYSEArca: GMMB) and the Grail McDonnell Core Taxable Bond ETF (NYSEArca: GMTB). [Why Actively Managed Bonds Are in Favor.]

The Grail McDonnell bond ETFs allow portfolio managers unrestricted trading. The funds offer low-cost exposure to the bond market, transparency of holdings and intraday liquidity. McDonnell Investment Management is sub-advising both funds. Both ETFs will limit maximum expense ratios to 0.35%.

Grail CEO William Thomas says the provider chose to launch fixed-income funds because “This is a fixed-income market, and investors are looking for fixed-income ETFs.” The volume they’ve seen in the funds in their early days of trading underscores this, Thomas says. [Are ETF Criticisms Founded?]

Thomas feels strongly that actively managed ETFs are the next step in the evolution of ETFs, and other big-name firms are joining the actively managed ETF space, which only validates what Grail is doing. Thomas observes that the lower fees, transparency, tax efficiency and liquidity in ETFs is forcing other firms to adopt such measures to stay competitive in a fast-growing industry.

Growth in assets is not shooting up as fast as some people thought, but Thomas says he couldn’t feel any more strongly than he does that actively managed ETFs will continue to grow and that they’ll have a place in the larger ETF industry. [Opportunities for Actively Managed ETFs.]

“My belief is that actively managed ETFs work for both equity and fixed-income, that the inherent benefits that ETFs offer shareholders are critical,” he says. “There have not been large inflows into equity ETFs, but you’re not seeing flows to equity mutual funds, either.”

Thomas also expects future actively managed ETFs will include equity, fixed-income, sector funds, country-specific funds and additional fixed-income capabilities. As for where Grail hopes to be in the future, “Onward and upward. We want to expand on our reputation as the leader in delivering active strategies in the ETF marketplace.”

To reach that goal, Thomas says, Grail eventually wants to offer an “all-weather” product line that is done with the best sub-advisors for any particular strategy. [Tom Lydon Talks About Active ETFs.]

For more information on actively managed ETFs, visit our actively managed category.

Max Chen contributed to this article.

ETFs are used by more and more entities: institutional investors who use ETFs to invest new money quickly or hedge existing positions, financial advisors who use ETFs to create low-cost portfolios for clients, respected educational endowments and average investors who use them for long- or short-term trades, remarks John Waggoner for USA Today.

It’s no wonder, since ETFs offer a low-cost way to put money into stocks, bonds, commodities and real estate, and ETFs offer a way to bet on a segment of the market without having to deal with volatility in individual stocks.

The industry is not without its critics, though. ETF investors should be wary of the looming pitfalls associated with the investment vehicle. “Sometimes the temptation to trade overcomes investors’ common sense,” remarks Jim Lowell, founding editor of the ETF Trader.

Wall Street has been dangling ETF offers that may not be so good for the average investor, including, Waggoner says:

• Leveraged funds. Such funds offer twice or even three times the return compared to the underlying index. Note that the return is on a daily basis and they shouldn’t be used for long-term investing. The make-up of such funds also means that the losses are leveraged, too. [Leveraged and Inverse ETF Special Report.]
• Niche funds. There are more than 900 ETF options, and some funds are highly specialized. Potential investors are lured into specialized funds because of their huge gains. Investors should be aware that the specialized funds are volatile and, at times, thinly traded – low liquidity means share prices aren’t reflecting the benchmark index very well.
• Active management. The newest addition to the ETF world are actively managed ETFs. Professional money managers also eagerly use ETFS. According to Strategic Insight, institutional investors own half of the industry’s assets. Fund managers are looking to ETFs as a store for excess cash. Furthermore, financial advisors have warmed up to the idea of using ETFs in their investment portfolios. [More on Actively Managed ETFs.]

MarketRiders’ Tuchman also observes that fund providers may not have the investors’ best interests at heart in their rush to get new assets. Some new index funds try to reflect indexes that have been created just for the new fund. It is difficult to evaluate a fund without some data on how the underlying index performed over time.

I’ve known John Waggoner for more than 20 years. He’s a fair reporter and is trying to be balanced, but these criticisms don’t hold much water. Those who are critical of ETFs tend to not really understand their makeup and pricing. To be sure, ETFs aren’t perfect, but if the primary concerns are that there are too many and that they allow for speculation, a stronger argument is going to be needed.

For more information on ETFs, visit our ETF 101 category.

Max Chen contributed to this article.

Many actively managed ETFs are still trying to build track records and prove that they can generate alpha in order to lure investors. One segment of the space that’s appealing to investors right now are actively managed fixed-income funds, says Shishir for In Focus. [Hurdles for Active ETFs to Clear.]

What gives? One reason is the names behind some of these funds. PIMCO has launched several active bond ETFs, and one of those – PIMCO Enhanced Short Maturity (NYSEArca: MINT) – has already surpassed $115 million in assets. PIMCO has a strong reputation in the fixed-income market, so it’s no surprise that investors are eager to take advantage of their expertise in a low-cost, transparent format. [How to Protect Yourself from the Deficit.]

Investors might also be finding actively managed bond funds appealing because of just that – they’re actively managed. In these uncertain credit conditions, having a portfolio that adjusts accordingly may be of great comfort to many investors who don’t want to have to do the shifting and changing themselves. [Beware of a Bond ETF Bubble.]

Another reason could simply be that equity markets haven’t been on solid footing since most active funds have launched. The majority of actively managed equity ETFs were released in late 2008 and into 2009 – hardly heady times for the markets. Although there has been a rally, investors were slow to be convinced that it would stick for the long haul.

For more stories about actively managed ETFs, visit our actively managed category.

First Trust

After getting off to a slow start, providers are quickly getting into a fast-growing line to launch their own actively managed ETFs. Add First Trust to the list.

The ETFs are:

• First Trust Developed International Markets AlphaDEX Fund
• First Trust Emerging Markets AlphaDEX Fund

The Developed International Markets fund invests in mid- to large-cap companies in non-U.S. developed markets, which include Japan, Hong Kong, Western Europe, Canada, New Zealand and Australia, says Active ETFs in Focus on Seeking Alpha. The Emerging Markets fund invests in mid- to large-cap companies in emerging countries that are in the early phase of the industrialization cycle.

The Developed Markets fund starts off with an initial universe of 300 securities, while the Emerging Markets fund uses a narrower universe of 150 highest ranking securities.

First Trust recently filed for equity-based platinum and copper ETFs, and this is their first step toward active management in ETFs.

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

ETF industry veterans and newcomers are getting on board with actively managed ETFs by filing with the Securities and Exchange Commission (SEC) to launch their own such funds. Names include PIMCO, Goldman Sachs, Claymore and Vanguard. [Hurdles Facing Actively Managed ETFs.]

Shishir for In Focus says that active ETFs are at a crossroads: their growth could explode or they could fade away. Much of that depends on how new issuers grasp two huge opportunities that active ETFs are presented with today:

• Grabbing mutual fund market share: The U.S. mutual fund industry currently manages in excess of $12 trillion in assets, with global mutual funds managing more than $26 trillion. In comparison, active ETFs in the United States currently manage about $200 million. Active ETFs do have lower expense ratios than mutual funds, along with transparency, so the potential here is huge if investors realize the superior benefits.
• Grabbing the 401(k) retirement market share: With daily disclosure of holdings, investors will know exactly what’s going in their portfolios. That also helps reduce any deviations of the market price from the fund’s net asset value. This is what makes these new products attractive to financial advisors, who are most often the gatekeepers to investors’ 401(k) plans. Although mutual funds are a staple of the retirement market, ETFs (including active ones) have the ability to take that market share as their attributes become known. [4 Big Benefits of ETFs.]

For more stories about active ETFs, visit our actively managed ETF category.

The first actively managed ETF came to market from Bear Stearns, but it disintegrated not long after the firm itself did. Steve Johnson for Financial Times reports that since then, 16 active ETFs have been listed in New York and Toronto, primarily by Invesco PowerShares, Grail Advisors and BetaPro Management, according to figures from BlackRock.

Through 2009, the concept has gained $178 million in assets under management – a small sliver in the larger industry. As more big names file to launch their own versions of actively managed funds, though, the asset situation could change.

While most agree that there’s appeal in active management, there are some issues to contend with:

• Actively managed ETFs have to disclose their entire portfolio compositions on a daily basis so that market makers creating new units or canceling existing ones know what they need to buy or sell. Some providers are less concerned with the potential for front-running than others, though. [Trends in active management.]

• A smaller obstacle may be that few investors will be willing to buy into any of the newer actively managed ETFs because there’s no track record. But if these managers prove that they can generate alpha, they just might see the investors come. [Will active ETFs benefit from the flow of mutual funds closing up shop?]

Active ETFs have lots of advantages over mutual funds: intraday liquidity, no minimums and, on average, lower costs. It’s hard not to see the appeal they hold.

For more stories about active management, visit our actively managed category.

Accrding to PIMCO, the PIMCO Short Term Municipal Bond Strategy Fund (NYSEArca: SMMU) will be made up of short-term, high-credit quality bonds that carry interest income, which is exempt from federal tax and, in some cases, state and local taxes. [Grail Advisors launches new active bond ETFs.]

PIMCO does not rely on rating agencies for credit analysis. Instead, the fund company will research each muni bond. PIMCO has more than 20 years of experience in dealing with municipal bonds.

The active management style offered will allow the fund manager to invest in issuers and securities that PIMCO endorses. Most importantly, the firm will be able to manage capital gains and losses in a way that will minimize the tax effect of gains and harvest losses when necessary. [Beware of a bond bubble.]

The ETF will be accessible to any investor. The fund discloses all underlying holdings in the portfolio on a daily basis. [PIMCO's other muni ETF.]

ohn Cummings is the portfolio manager for the fund. The management mee is 0.35%, total annual operating expenses is 0.55% and net annual operating expenses is 0.35%.

For more information on new ETFs, visit our new ETFs category.

Max Chen contributed to this article.