Because individual investors cannot easily replicate an active fixed income ETF, they tend to dominate the active space, especially those with high profile active managers with great name recognition. Note, the SPDR DoubleLine Total Return Tactical ETF [TOTL], a collaboration with Jeffrey Gundlach and DoubleLine Capital, recently surpassed $1 billion in AUM since its launch in February.4
Challenges ahead
Active ETFs face hurdles apart from the issue of transparency. Some I think will be cleared with time. Remember, any active product generally needs a 3-year track record to show its merit to an investor base. And, we could be entering a market where investors begin to look more favorably on active funds as correlations have decreased, volatility has returned and dispersions may increase.
Cost is another factor we think investors will continue to wrestle with. There has always been premium pricing within the active management world. And these active ETFs are generally more expensive than passive products. Active ETFs do tend, however, to be cheaper than active mutual funds. According to Morningstar data as of September 29, 2015, the average active equity mutual fund has a 1.58% net expense ratio (2.24% gross), compared to a 0.90% net expense ratio for the average active equity ETF (1.30% gross). The average active fixed income mutual fund has a net expense ratio of 1.25% (3.86% gross) versus a 0.58% net expense ratio (0.76% gross) for the active ETF counterpart.
Finally, as it was with passive ETFs, education will drive how investors evaluate and use active ETFs. SSGA’s An Active ETF Due Diligence Checklist can give you a thorough framework to analyze active ETFs. In my next post, I’ll discuss our due diligence checklist in some detail.
1State Street Global Advisors, Bloomberg, as of 8/31/2015
2State Street Global Advisors, Bloomberg
3State Street Global Advisors, Bloomberg
4State Street Global Advisors, as of 8/17/2015
This article was written by James E. Ross, Global Head of SPDR ETFs at State Street Global Advisors.