S&P: Future Of Active ETFs May Brighten

May 07, 2012

They’re still fledglings, but S&P sees a brighter future for active ETFs.

Active ETFs have yet to garner significant assets, but they stand a reasonable chance of catching on because the number of big firms bringing products to market is increasing, according to a report from S&P’s MarketScope Advisor.

The report said that as of late April, 47 active ETFs with $5.8 billion in assets made up less than 0.5 percent of U.S.-listed ETF assets, which amount to $1.2 trillion—a percentage consistent with data compiled by IndexUniverse.

But with big ETF firms, such as State Street Global Advisors and Pimco now moving aggressively into the space, that could change, the report said. SSgA recently launched its first active funds, and Pimco rolled out an ETF version of its Pimco Total Return Fund on March 1. Pimco already manages the biggest active ETF, the $1.55 billion Pimco Enhanced Short Maturity Strategy Fund (NYSEArca: MINT).

The Pimco Total Return ETF (NYSEArca: BOND) gathered almost $700 million in just over two months. WisdomTree, another player in the active ETF space, has the second-biggest hit, the WisdomTree Emerging Markets Local Debt Fund (NYSEArca: ELD), which has $1.26 billion in assets as of Friday, May 4.

However, the most successful active ETFs to-date have been in the fixed-income and currency asset classes, the report said. About 2 percent of all fixed-income ETFs are active, and that number jumps to about 15 percent in the realm of currency, according to data compiled by IndexUniverse.

Active ETFs haven’t yet penetrated the world of equities in any meaningful way. All of the biggest and most liquid ETFs are index equities strategies, most notably the SPDR S&P 500 ETF (NYSEArca: SPY), which has just under $100 billion in assets.

Obstacles And Suggestions

MarketScope identified several potential obstacles to introducing actively managed ETFs. The main one is that successful fund managers are likely to be discouraged from offering active ETFs because of the daily portfolio disclosure required under current regulations. That can hamper a fund manager’s ability to build up competitive positions in securities.

One way the disclosure expectations associated with ETFs could be reduced, according to MarketScope, is by establishing ETF “fund of funds” that could soften the importance of changes in particular securities.

Another obstacle to launching actively managed ETFs is that the performance of track records for these funds are relatively limited since most of them are so new. MarketScope notes that of the 47 actively managed ETFs that they reviewed, 29 had been launched since 2010 and the oldest date back only to 2008.

Actively managed funds generally are more expensive to run because of the trading and increased research costs involved, according to MarketScope. This may be one reason that four active funds have closed since 2010, it said.

MarketScope is holding out hopes for active funds to attract more assets and generate significant returns. It said that active ETFs may be initially priced with artificially low expense ratios in the hopes of attracting more assets. Once the funds gather more assets, fund managers would be able recoup costs.


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