The ETF market is predominantly passively managed—of the 1,570 U.S.-listed ETFs today, only 84 are actively managed, with combined assets of around $15 billion.
Still, several active ETFs hold their own against passive funds, and some of the best performers are actually beating their indexed counterparts so far this year.
Below we list the five best-performing active ETFs so far in 2014, in ascending order.
BABZ invests in taxable municipal bonds publicly issued under the Build America Bond program. The portfolio of 33 securities is heavily allocated to revenue bonds and underweights general obligation issues, according to ETF.com Analytics.
Year-to-date, BABZ has seen returns of 4.4 percent, making it the fifth-best-performing active ETF.
But it’s worth pointing out that a similar index-based strategy, the PowerShares Build America Bond ETF (BAB| B-61), has now seen gains of 5 percent in the same period. What’s more, Pimco’s BABZ delivers slightly lower yield-to-maturity of 4.8 percent compared with BAB’s 5.5 percent. But it serves up lower sensitivity to interest rates.
“At 45 basis points, BABZ is fairly costly, but it’s the trading costs that investors should be aware of,” ETF.com Analytics says of the ETF. “The fund trades less than $200,000 on most days, with average spreads of 28 basis points—nowhere near liquid.”
The 33-holding bond fund, which came to market in September 2010, is currently delivering a 30-day SEC yield of 4.22 percent. The portfolio has an effective duration of 10.28 years and effective maturity of 19.25 years. BABZ has $20 million in assets under management.
FPE sets out to generate income by investing in preferred securities and income-producing debt from around the globe such as corporate bonds, junk debt and convertibles.
The ETF focuses on preferred stocks, which are known to generate more consistent income because they are higher ranking than common stocks in a company’s capital structure.
The one-year-old fund is currently delivering a 30-day SEC yield of 5.48 percent in a portfolio of nearly 100 securities that has a weighted average effective duration of less than six years. FPE, which is heavily allocated to the financial sector, currently has $58 million in assets and an annual expense ratio of 0.85 percent, or $85 for each $10,000 invested.
RWG has been around for more than four years, but it’s gathered only $16 million in assets. With a 0.80 percent expense ratio and an average trading spread of 33 basis points, owning RWG costs roughly $113 per $10,000 invested.
RWG is a growth-focused fund. It invests in U.S. large-cap stocks that show above-average growth prospects. It’s the only active ETF in a segment populated by the likes of the $23 billion iShares Russell 1000 Growth ETF (IWF | A-89) and the Vanguard Growth ETF (VUG | A-89), which has nearly $14 billion in assets, to name a few.
While it’s the most expensive in the segment and small in terms of assets, RWG’s performance has stood out so far this year relative to its index-based peers. IWF and VUG, for instance, have seen gains of only 2.6 and 2.9 percent, respectively, in the same period.
Still, IWF costs less than a fifth of what RWG costs, with an all-in price tag of about 21 basis points, while VUG costs about 13 basis points to own—roughly a tenth of RWG’s price tag.
RWG owns not only U.S. large-cap growth stocks, but also ADRs of foreign companies traded in the U.S.
PSR is also the only actively managed fund in an otherwise-predominantly passive ETF segment that includes strategies from iShares, Vanguard, State Street and Charles Schwab. The fund invests in U.S. REITs, and it tries to outperform the market.
PSR picks holdings from the universe of the FTSE NAREIT All Equity REITs Index based on proprietary statistical and quantitative metrics, according to ETF.com Analytics. It currently invests in 51 securities.
The active management comes with a price tag: The expense ratio on this fund is 80 basis points. PSR also trades with an average spread of about 14 basis points, putting the overall cost of ownership of this fund at about $94 per $10,000 invested.
What’s more, on a year-to-date basis, PSR has actually underperformed its passive counterparts—the $4.6 billion iShares U.S. Real Estate ETF (IYR | B-94), for instance, is up 7.88 percent in the same period, while the $21 billion Vanguard REIT ETF (VNQ | A-89) is up 9 percent. But the fund is still the second-best-performing active strategy so far in 2014.
FTGC is not even five months old yet; it came to market last October. The fund provides broad exposure to commodities through futures contracts, and is structured as a 1940 Act open-ended fund.
FTGC is the only actively managed commodities ETF in the market today, but the fund has an interesting structure. It does not own futures contracts directly, but gains exposure to commodities through its holdings in a Cayman Islands-based subsidiary, which holds futures contracts, according to ETF.com Analytics. That structure allows it to qualify as a 1940 Act fund rather than as a commodities pool.
“This also means FTGC intends to be taxed like other equity funds, and will not be distributing K-1 forms to its investors,” according to ETF.com Analytics.
Nearly 13 percent of the fund is allocated to WTI crude oil, followed by an 11.3 percent allocation to coffee and 10.7 percent to natural gas.
The fund isn’t cheap: It has an annual expense ratio of 0.95 percent. Also, it trades with an average spread of 35 basis points, putting its total cost of ownership at around $130 per $10,000 invested.
Charts courtesy of StockCharts.com
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