While the vast majority of the exchange traded fund universe is filled with passive index-based strategies, actively managed ETFs are slowly gathering momentum.
Actively managed options in the U.S. ETF industry has grown to 173 from 73 at the end of 2013, with assets doubling to $29 billion in three years, reports Stephen Foley for the Financial Times.
The marketplace is also seeing big names like DoubleLine and PIMCO expanding their suites while Vanguard group recently signaled it could enter the market next year.
Tthe SPDR DoubleLine Total Return Tactical ETF (NYSEArca: TOTL) has been a popular active bond play for ETF investors. TOTL is an actively managed ETF backed by bond guru Jeff Gundlach and is also seen as an ETF adaptation of the flagship DoubleLine Total Return Fund (DLTNX). DoubleLine and SSGA have also partnered up with the more recently launched SPDR DoubleLine Short Duration Total Return Tactical ETF (BATS: STOT) and SPDR DoubleLine Emerging Markets Fixed Income ETF (BATS: EMTL).
According to a recent SEC exemptive relief filing, Vanguard is seeking to allow a group of its active funds to be permitted to issue ETF shares that will be actively managed as well. Vanguard has a patent that allows it to offer ETF share classes of its existing mutual funds.
“In this industry you see that successful funds beget more successful funds, so you are likely to see more active ETFs,” Jeffrey Sherman, who co-manages the SPDR DoubleLine Total Return Tactical fund, told the Financial Times. “We see the fund flows going to ETFs. We see advisers who only follow the ETF model. We see investors using ETFs and not mutual funds. If there is a vehicle via which we need to deliver something, then we are going to look at it. We are agnostic as to the vehicle.”
More money managers are diving into the ETF space as the fund structure helps keep tax bills low, and paperwork and distributions are also lower than traditional open-end mutual funds. The savings are then passed onto investors in the form of lower investment fees.
Further momentum in the active ETF space will come down to performance. While the inability of equity fund managers to beat the market over the long-term has been proven by academic research, bond managers may have more leeway. Debt markets are more diverse and broad benchmarks lean toward low-yielding government bonds, so active management has an opportunity to beat the benchmarks, especially in a rising rate environment.
Moreover, active bond ETF managers are less loath to publish holdings on a daily basis due to the vast quantity of debt securities floating around.
“If you want to trade Apple equity, there is only one security to buy, but if you want to trade Apple bonds, you have a choice of different maturities, a choice of different currencies,” Sherman said. “Transparency is not an issue when you have a large number of portfolio securities.”
For more information on active ETFs, visit our actively managed ETFs category.