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.
Every new product launch requires a strong figurehead or a major company that investors can associate with. O’Leary, in our conversation, used the example of Bob Reynolds, CEO of Putnam Investments. About a year back, Putnam came out and launched a family of absolute return funds and Bob Reynolds went on, did a lot of advertising, came on and talked about it on CNBC and Bloomberg. Putnam has since taken in $2 billion of assets on those absolute return funds, even though they are load products. “That’s what Active ETFs need – they need somebody like a Bob Reynolds at Putnam who has a face, who has the ability to project into the public, who can go onto the shows and have articles written and have the public relations behind him”, added O’Leary.
There are some possibilities of figureheads emerging in the Active ETF space. PIMCO, of course, has really started making its presence felt in the space and given its strong reputation in the fixed-income world, it could be that provider that people can start associating Active ETFs with if they decide to promote these products strongly. Another candidate is Jeffery Gundlach, the well-respected bond manager that now runs DoubleLine Capital. DoubleLine partnered with Grail Advisors in July this year to plan for Active ETFs sub-advised by DoubleLine. Again, given the stature and reputation that Jeffery Gundlach brings with him, if his firm starts to make a strong push in Active ETF space, that could certainly attract some positive attention.
There are also the large mutual fund players, like Eaton Vance, Legg Mason, T. Rowe Price, who have shown interest in the space and could play a role in the future. But they will need to lay down a strong product line up, like PIMCO has, before they will have any effect on the market place. O’Leary echoed these sentiments saying, “You need to have a family of products, 10 or 12 or 20 products. Then you can come out and say this covers most of the major niche parts of a person’s portfolio and we as a major mutual fund company have put our capital up and our brand up and we think this is a great idea. That’s the sort of promotion that’s not occurring right now”.
Education Alone Not Sufficient, Promotion Key
Education is indispensible. Educating investors about the intricacies of a new product is no doubt helpful in ensuring that investors know what they are getting into and making them aware of important differences. However, education by itself is not enough to generate the kind of attention necessary for a new space like this to take off. That’s where promotion and marketing are just as crucial, especially if Active ETFs hope to taste the kind of success that other new ETF segments have enjoyed.
Disclosure: No positions in above-mentioned names.
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