Despite dissenting opinions about the nascent ETF theme, the actively-managed exchange traded fund (ETF) space is gaining in popularity among both investors and fund providers alike. Most of those arguments don’t hold water.
According to Shishir Nigam for Active ETFs InFocus, there are three main arguments that should be taken seriously since they may hold back growth for actively-managed ETFs.
- “Active managers don’t want transparency.” What keeps actively-managed ETFs a leg up against actively managed mutual funds is the fact that the managers of active ETFs disclose their daily holdings, even though it comes with a one-day lag. Some active managers may not want to disclose this information, but this doesn’t seem to be dissuading some of the big industry names that have launched or plan to launch their own actively managed funds.
- Distribution channels. The majority of assets invested go through financial advisors, and the majority of advisors are “fee-based” – advisors who charge fees and collect commissions from services. Most advisors receive a trailer fee from mutual funds they recommend, which results in the commonly whispered phrase that “mutual funds are sold, not bought,” remarks Nigam. However, with most ETFs, there are no such trailer fees. Claymore has tried to address the issue in Canada by offering an “advisor class” that pays trailer fees to advisors, giving an incentive for advisors to recommend the products, but those come with bigger expense ratios. At the end of the day, the intraday liquidity, transparency and lower fees of ETFs will put them ahead of mutual funds.
- Perceived liquidity. The widespread notion that visible volume equals “liquidity” will hinder the growth of actively-managed ETFs. Advisors and investors both falsely deem ETFs illiquid if they don’t see high volumes in the funds. Despite the fact that new ETF products have low volumes starting off, large orders can be executed with little impact. [Why Low Volume Doesn’t Mean They’re Illiquid.]
For more information on active ETFs, visit our actively managed ETFs category.
Max Chen contributed to this article.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Mr. Lydon serves as an independent trustee of certain mutual funds and ETFs that are managed by Guggenheim Investments; however, any opinions or forecasts expressed herein are solely those of Mr. Lydon and not those of Guggenheim Funds, Guggenheim Investments, Guggenheim Specialized Products, LLC or any of their affiliates. 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.