By Todd Rosenbluth, CFRA
Based on recent regulatory filings, investors should expect more ETF choices to consider as established active managers further expand their lineup to offset competitive challenges. Indeed, Janus Henderson and PGIM (the new name for Prudential’s asset management business), which have a small number of ETF products but a large mutual fund presence, are poised to follow the lead of JPMorgan (JPM 106 *****) and Oppenheimer Funds and others seeking to compete with more established ETF providers.
According to John Swolfs, CEO of Inside ETFs, as these firms look to compete with State Street, BlackRock (BLK 507 ****) and Vanguard, asset managers need to differentiate their products and not just offer a me-too approach. However, a firm needs to have resources to get the message out in a crowded market.
Swolfs, whose firm hosted the Inside Smart Beta & Active Summit in June, was part of a video series CFRA has produced to help investors better understand the growth prospects and challenges the ETF industry is facing. We will be posting these videos to our https://newpublic.cfraresearch.com/etf-videos/ website in July and referencing them in content on MarketScope Advisor.
https://newpublic.cfraresearch.com/trends_in_smart_beta/
At the Smart Beta & Active Summit, CFRA joined asset managers and other analysts to provide advisor education. As Swolfs further explained in the CFRA video, there’s an acceptance of the theory behind smart beta, but advisors are struggling with implementation. Sessions at the conference highlighted how these products can fit within an existing portfolio and particularly in a downturn.
For example, advisors have long used large-cap value funds and paying an average 1.02% net expense ratio. While some actively managed funds have been consistently strong performers the last few years, such as Dodge & Cox Stock Fund (DODGX 208 ****) and Oakmark Fund (OAKMX 88 ****), the average fund underperformed the S&P 500 Value index by more than 100 basis points in the three-year annualized period ended July 6.
Yet, there are smart-beta ETFs that are constructed based on value characteristics, such as iShares Edge MSCI Value Factor ETF (VLUE 84 Overweight), JPMorgan US Value Factor (JVAL 26 Marketweight) and Oppenheimer Russell 1000 Value Factor (OVLU 27 Marketweight), which have net expense ratios or 0.20% or below; the latter two launched in 2017.
Eric Balchunas, Senior ETF Analyst at Bloomberg Intelligence, told CFRA in a separate video that smart beta is like an artificial intelligence version of an active manager. “It’s like your own personal R2D2”. CFRA agrees that some of the metrics used to support active mutual funds can be built into a rules-based, emotionless smart-beta index ETF.
https://newpublic.cfraresearch.com/demystifying_etf_market/
However, the regulatory filings from Janus and Prudential are for actively managed ETFs, a burgeoning area of the ETF market. According to Bloomberg data, active bond ETFs gathered $4.4 billion in the second quarter of 2018, up from $3.3 billion in the first quarter and $2.9 billion a year ago.
PGIM is awaiting regulatory approval to launch an active high yield bond ETF, while Janus Henderson is planning a mortgage-backed securities ETF. Though the larger actively managed bond ETFs provide exposure to the bond market, such as PIMCO Enhanced Short Maturity Active ETF (MINT 101 Overweight) and iShares Short Maturity Bond (NEAR 50 NR), there are limited assets in active high yield bond strategies and no such products focused on the mortgage market. CFRA thinks there is still a lot of white space for asset managers to launch compelling products.
We think PGIM has expertise in the high yield market it can tap into, with the actively managed and CFRA five-star rated PGIM High Yield Fund (PHYZX 5 *****) performing its high-yield bond mutual fund peer group on a one-, three- and five-year total return basis. Relative to mutual fund peers, the fund incurs more credit risk than peers, but has generated an above-average Sharpe ratio.
Meanwhile, though Janus Henderson does not offer a stand along mortgage mutual fund, Janus Henderson Flexible Bond Fund (JAFIX 10 ***), a CFRA three-star core plus bond offering, recently had 27% of assets in the sector. The fund also holds Treasuries and corporate bonds.
CFRA agrees with Swolfs that we’re going to see more actively managed ETFs come to market as the category is gaining acceptance with advisors, many that still hope to outperform a benchmark to support client goals. We typically begin quantitative coverage of an ETF within three months of its launch and stand ready to educate advisors about the growing universe. Approximately 30% of the ETFs rated by CFRA launched since the end of June 2015.
CFRA will be hosting a webinar on July 25 at 11am ET titled Active Mutual Funds vs. Index ETFs: 2018 Click here to Register TODAY!
Todd Rosenbluth is Director of ETF & Mutual Fund Research at CFRA.