3 Active ETFs With Potential To Outperform

October 19, 2016

When it comes to ETFs, active management is still small potatoes. Of the $2.4 trillion in U.S.-listed exchange-traded funds, only a fraction is in actively managed products.

According to the ETF.com Active Management channel, there are currently 161 active ETFs on the market with combined assets of $27.7 billion, or 1.2% of total ETF assets (for comparison, active funds account for 86% of total mutual fund assets).

Of those 161 active ETFs, the majority are tied to fixed income―nine of the top 10 active ETFs by assets are fixed-income ETFs.

The active ETF space is also top-heavy, with the 10 largest active ETFs holding a combined $18.8 billion in assets under management (AUM), compared with $8.9 billion for the other 151 ETFs.

Active ETF Struggles

There are plenty of reasons why active ETFs haven't taken off. Daily disclosure requirements that have kept big-name portfolio managers away and competition from "smart beta" products are a few reasons active management hasn't made a splash in the ETF world.

Poor performance is another factor why some investors may be turned off by actively managed ETFs. As the data clearly show, most active managers fail to beat their benchmarks year in and year out.

SPIVA, a report that measures the performance of active funds against S&P indexes, suggests that more than 90% of active domestic equity fund managers failed to beat their benchmarks during the past year. For international equity and fixed-income fund managers, the numbers are only slightly better.

Active MLP ETF Trounces Passive Competition

Still, despite the higher fees and the difficulty of outperforming passive benchmarks, some actively managed ETFs are doing quite well.

For example, the actively managed First Trust North America Energy Infrastructure Fund (EMLP) is up 26.5% year-to-date. That's more than double the gains for passive rivals such as the Alerian MLP ETF (AMLP) and the J.P. Morgan Alerian MLP Index ETN (AMJ).

YTD Returns For EMLP, AMLP & AMJ

With $1.4 billion in assets, EMLP is the fourth-largest fund in the complicated MLP ETF space. Unlike many competing products, the ETF only holds 25% of its portfolio in MLPs, and the rest in stocks of other non-MLP energy infrastructure companies.

Thanks to this different structure and the fund's management, EMLP has outperformed not just this year but since inception. Since June 2012, the EMLP has returned 45%, compared with 9.1% for AMLP and 8% for AMJ.

 

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