While the vast majority of the ETF universe tracks passive index-based strategies, the actively managed ETF segment is gaining a larger following and could pick up steam.
According to Morningstar Direct, actively managed ETFs attracted net inflows of $23 billion last year through October, which already exceeded the full-year total over 2017 by 48%, Wealth Management reports.
There are currently 266 actively managed U.S.-listed ETFs with $71.6 billion in assets under management, which is a drop in the bucket compared to the U.S. ETF industry’s total $3.6 trillion in assets under management, according to XTF data.
Actively managed ETFs come with all the benefits of the traditional beta-index ETF structure, such as lower fees, no investment minimums, higher liquidity and tax efficiency. However, actively managed ETFs are not passive index-based ETFs, which means investors need to have a high conviction for the active management team behind the strategies.
“Investors should be aware that these are active strategies,” Ben Johnson, director of global ETF research for Morningstar, told Wealth Management. “Just because you deliver it in a new package doesn’t mean you provide antigravity boots. Some do well; some less well.”
Nevertheless, Johnson highlighted the fact that investors will pay less on actively managed ETF strategies than the traditional mutual fund counterparts.
“Average retail investors get fees comparable to institutional share prices for the ETFs’ sibling mutual funds,” he said.
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Active ETFs tend to issue lower fees than actively managed mutual funds because ETFs do not have to worry about record keeping for individual shareholders, the 12b-1 marketing fees or hiring transfer agencies. The average fee for actively managed funds hovered around 1.12%, whereas active ETFs come with an average 0.66% expense ratio.
“Investors are increasingly cost-focused,” Todd Rosenbluth, director of ETF and mutual fund research at CFRA, told Wealth Management. “In the equity space, active management has failed to consistently deliver outperformance, so investors are more hesitant than perhaps they should be to take a look at some of these products.”
Looking ahead, Johnson argued that fund managers will unlikely fully commit to actively managed ETFs until the Securities and Exchange Commission makes it harder for them to mask their underlying holdings or offer nontransparent funds to protect their secret sauce and prevent front running.
For more information on active ETF strategies, visit our actively managed ETFs category.