A recent report by McKinsey & Co. predicts that the actively managed exchange traded fund business will take off and hit the $1 trillion mark within a decade. Thus far, actively managed ETFs account for 1% of all ETFs, and in the U.K., where the study is focused, the percentage is lower.
Actively managed ETFs have yet to gain major traction, although providers have been trying to get specific active ETFs off the ground. According to Chris Flood for the Financial Times, there are more than 800 applications for new active ETFs that have been filed with the SEC.
“Many are from traditional managers without ETF products who are simply preserving their options in case the market expands,” McKinsey said.
The major hurdles facing active ETFs are transparency issues, and higher costs. [BlackRock Files to Launch Active ETFs]
Active ETFs have higher costs than index-based funds partly due to stricter disclosure requirements, Mindful Money reported. There are also higher management fees because managers are selecting securities for the portfolio, rather than tracking an objective index. [Active ETFs: To Fee or Not to Fee?]
Transparency is a main attraction of passively managed ETFs, which disclose their holdinsg during the trading day. For active funds, the problem of front-running is an issue. [Why Actively Managed ETFs Haven’t Taken Off Yet]
“A primary obstacle to growth of actively managed equity ETFs is the likely reluctance of successful managers to abide by the expectations that holdings be disclosed daily,” said Tom Graves, S&P equity analyst, according to the FT report.
Tisha Guerrero contributed to this article.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. 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.