Bill Miller And Active ETFs

November 18, 2011

Does the departure of a famous manager tell us anything about the outlook for active ETFs?

Bill Miller’s value-oriented mutual fund had a great run, besting the S&P 500 for 15 straight years before losing his way in the 2008 financial crisis.

Miller can look back at a long career as a stock picker. But unlike the mutual fund world, ETFs that specialize in active security selection never really took off. And it’s an open question whether they ever will.

Before I look at why this is, a peek at today’s active ETF landscape might help.

Active ETFs hold less than 1 percent of all ETF assets, with roughly $5 billion out of a $ 1 trillion ETF pie.

Of active ETF assets, equity and alternative funds—classic stock-pickers—make up less than 10 percent. Instead, fixed income rules the roost, gobbling up two-thirds of the active ETF pie.

Managers arguably have greater capacity to add value in the fixed-income space.

Firms typically issue many different bonds, but only one common stock. Bonds trade less frequently making price discovery harder, with the exception of U.S. Treasurys.

Also, good fixed-income information is expensive. And getting the analysis right isn’t easy. Just ask the rating agencies. Sovereign, municipal and asset-backed debt each call for special skill sets.

Little wonder then that two fixed-income ETFs dominate assets: the Pimco Enhanced Short Maturity Strategy Fund (NYSEArca: MINT) and the WisdomTree Emerging Markets Local Debt ETF (NYSEArca: ELD).

MINT leverages the reputation of bond maven Bill Gross. ELD hunts for credits in a universe where paying a bit extra to have someone to pick the bonds in your basket might seem like cheap insurance.

But the hefty assets in these two funds are the exception, not the rule. As the numbers show, active ETF assets are dwarfed by passive. What gives?


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