This is a guest post contributed by Shishir Nigam, editor of Active ETFs in Focus.
When asked why actively-managed ETFs haven’t taken off as successfully as most people expected, many issuers point to the need for education. It took investors more than a decade to get comfortable with index ETFs and trust them enough to use them as frequently as they do today. And even then many feel awareness about index ETFs has a long way to go. Active ETFs in comparison will only be celebrating their 3rd anniversary in the US in a few months time. So in comparison, it’s no surprise that the initial response when Active ETFs first hit the market was lukewarm, because investors didn’t even understand what they were looking at.
However, seen from another angle, there have been many other new types of ETFs that have been brought to market in the last few years that have also been fundamentally different from plain vanilla index ETFs, but investor response to those products has been tremendous. A case in point would becommodity ETFs. Compared to actively-managed ETFs, commodity ETFs are probably way more complex in the way that they derive their exposures and their use of derivatives. In contrast, most Active ETFs are much closer to the typical active mutual fund that investors are already so familiar with. According to data from BlackRock, assets in global commodity ETFs and ETPs stood at $145 billion at the end of Q3 2010, a tremendous increase of $46 billion since 2009. The major chunk of commodity ETFs on the market have also been launched in the last few years, during the same time that Active ETFs have been brought on to the market. So the question then becomes, how have commodity ETFs been able to achieve that level of success despite being an equally or even more complex product than what Active ETFs are? Given their complexity, the burden of educating investors is likely much greater for commodity ETFs than for Active ETFs, so how have they gained that much more traction?
What’s The Missing Ingredient?
One very clear difference that stands out if you contrast the evolution of these two relatively new ETF products is effective promotion. To most people that frequent finance websites, or are engaged with the financial media in one way or another, the sight of the latest new commodity ETF being publicized and promoted is very common. For example, when the Global X Lithium ETF (LIT) was launched in late July this year, there was extensive promotion done for the fund’s launch. Investors were given an investment thesis and a good story they could subscribe too. It should be no surprise that LIT has quickly amassed $88 million in assets. Just anecdotally, promotion and advertising efforts for actively-managed ETFs have been nowhere close to what has been seen for other new ETF products such as commodity ETFs, inverse ETFs and leveraged ETFs. That might just be a big part of the explanation as to why Active ETFs have not really gone very far in the US.
The first actively-managed ETFs were launched by PowerShares in April 2008, which looking back now probably wasn’t the best time to launch new ETF products given how the market fared over the next few years. However, poor timing aside, could Active ETF issuers have done more to push these new products when they first hit the market? ActiveETFs | InFocus spoke to the portfolio manager behind two of the PowerShares Active ETFs, David O’Leary – CIO at AER Advisors, and this is what he had to say about the marketing efforts upon launch, “Because of the market decline, PowerShares never really got the marketing of Active ETFs going, they never really pushed them in advertising. So the whole idea kind of died on the vine”.
The Need For A Figurehead, A Cheerleader
Nearly every major new ETF form that has gained traction amongst investors over the last few years has been lead by one or two major firms that investors immediately identify with when they think of those products. For example, when you think of leveraged and inverse ETFs, Direxion and ProShares come to mind. When you think of commodity ETFs, while not as obvious, companies like US Commodity Funds come to mind.