Active ETFs: What’s All The Hype?

December 14, 2014

Lane argued that the growth of active ETFs is an evolution that is working its way through the fund management industry.

“It is really a story about how the value chain among the industry professionals, such as broker dealers and managers, is being deconstructed into a lower cost and more efficient version.  But let's not forget that Darwin also pointed out this process of evolution can lead to some very odd animals that, in the end, didn’t survive.”

Due diligence remains the same for active ETFs

Lane explained that from the perspective of an investor, the due diligence process would be the same for these instruments as for any other.

“Given the fees I am paying, [I ask myself] how well did my investment perform?  Just on statistical grounds alone, once there are 1,000 active ETFs on offer, I would anticipate that many managers will fail to beat their benchmark.”

Lane added that investors will have to place emphasis on their asset allocation before deciding which wrapper is best.

Prices will fall

But while active ETFs are notoriously expensive, how does that fit in with the traditional ETF space, which is renowned for being cheap?

Lane said that if active ETFs are overly expensive an adviser wouldn’t likely recommend them. However, with new products and different value propositions come different pricing.

Currently the market offers prices in the single digit basis points for passive ETFs, while smart beta ETFs range from 30 to 70 basis points and active ETFs come in at the higher end of that range.

However, according to Lake, overall fees in the active management space are drifting lower.

Returning to education

Lake said that smart beta, or non-market cap weighted ETFs, have offered different return profiles to investors and have been successful in growing assets, therefore this success could continue with active ETFs.

“There is a tremendous amount of interest in active ETFs, but whether the industry in Europe has delivered the right products yet is still unclear,” he said. “However, it is never too early to begin the education and conversation on active ETFs. It’s a question now of finding the [relationship] between supply and demand.”

 

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