This topic was also discussed at the recent Morningstar ETF Invest conference held in Chicago. The discussions on Active ETFs yielded two areas where actively-managed ETFs make sense for investors over passive cap-weighted ETFs – high yield bonds and commodities. The rational for active management in high-yield bonds has already been discussed above. Commodities are another such area for a very different reason – the negative roll yield in futures market resulting from contango. In the past year, many passive commodity ETFs, such as United States Natural Gas Fund (NYSEArca: UNG) have come under heavy fire for strongly underperforming the spot returns on the underlying asset. In many cases this has been due to a futures market for those commodities that are in a state of contango – where the longer-dated futures are more expensive than the near-month futures. Since most passive commodity ETFs get their commodity exposure by purchasing near-month futures and then rolling forward the contracts at expiry, they are exposed to losses because the contracts they are rolling into are more expensive than contracts they are closing out on.
ETF manufacturers have only recently made attempts to address this problem through new designs and structures. This is clearly another area that can benefit from active management to help avoid the obvious losses that result from a contango market. Again, at the moment there are no actively-managed commodity ETFs on the market and there are none that are planned or have been filed for either with the SEC. So this is definitely one area where issuers of actively-managed ETFs could find some investor interest – an actively-managed ETF providing pure commodity exposure.
Disclosure: No positions in above-mentioned names.
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