Active ETFs Miss The Mark

June 19, 2018

[This article appears in our July 2018 issue of ETF Report.]

Even as ETFs have gone mainstream, active ETFs remain a Wild West, full of frontiers to explore and claims to stake. Though there are now 225 actively managed ETFs on the market, they total just $59 billion in assets under management (AUM)—or 2% of the $3.5 trillion invested in ETFs as a whole. 

Interest in them appears to be growing, however. Combined, active ETFs have brought in $20 billion in new net inflows over the past 12 months, as of this writing.

But do the returns of active ETFs justify all this investor excitement? We crunch the numbers to find out.

Tiny Assets, Outsized Flows
First, let’s set the scene. By far, the largest active ETF is the PIMCO Enhanced Short Maturity Active ETF (MINT), with $9.3 billion in AUM. (MINT also had the largest inflows of the past year, of $2.3 billion.) Other big active ETFs include the iShares Short Maturity Bond ETF (NEAR) and the First Trust Preferred Securities & Income ETF (FPE) (see Figure 1).

 

 

It’s easy to see the common denominator here: fixed income. All but two of the 10 largest active ETFs are bond funds; fixed income also accounts for eight of the 10 active ETFs with the largest inflows over the past year (see Figure 2).

 

 

The “why” makes sense: Even dedicated passive investors may seek active management in the bond market, a notoriously complex marketplace where literally millions of individual bonds trade daily. An active manager acts as a sort of helping hand, a Sherpa in the wilderness that can tease out effective exposure and mitigate risk. It’s also why you see active ETFs cover other market segments with steep learning curves: commodities, alternatives, even certain highly specific themes, like genomics or blockchain.

But does that helping hand actually help?

Some Outperformers Exist
The good news is that, of the 166 active ETFs with track records longer than one year, a good chunk of them—31—either outperform the broader market, as measured by the SPDR S&P 500 ETF Trust (SPY), or come within 1 percentage point of doing so (see Figure 3).

 

 

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