Time For Active ETF Managers To Shine

September 20, 2013

With correlations dropping, the time may be ripe for active ETF managers to shine.

Sector correlations are trending lower toward levels not seen in three years, making the jobs of active managers and stock pickers a lot easier these days. In the ETF world, only a small 4 percent of the 1,505 U.S.-listed funds are actively managed, but there’s nothing small about some of the stellar performances—and asset-gathering success—some of these active ETFs have had.

In a broad sense, active management in ETFs is still a relatively new trend—none of the 62 active ETFs today has been around much longer than five years—but it’s also a segment that’s been growing and will continue to do so if the slew of exemptive relief filings submitted to regulators recently by various prestigious mutual fund managers is any indication.

In a way, many have suggested that advisors’ and investors’ affinity for active management should continue to encourage fund providers to bring active management to the predominantly passive world of ETFs, and so far that seems to be the case. Even large passive shops like iShares and State Street Global Advisors—the Nos. 1 and 2 ETF providers today—have recently begun launching actively managed funds for the first time.

“If you look back at 2010, 2011 and most of 2012, it was a risk-on/risk-off marketplace where money was just slashing back and forth between major categories,” First Trust ETF Strategist Dan Waldron told IndexUniverse. “Investors and advisors were not being too discriminating. During that period, it was very difficult for active managers to beat the benchmarks.”

“There are periods of time when passive investing does better because the market is not discriminative,” he added. “But in the last 12 months, we’ve seen a pendulum swing back toward active management because investors are now getting back in the market and saying, ‘I want to buy a health care stock and I want to pay the right price for it.’ They’re looking at fundamentals again.”

With such background in mind, and mindful that die-hard indexers such as Burt Malkiel take issue with the idea that active is ever superior to passive, it’s worth taking measure of the active strategies in the ETF market today in terms of asset gathering and/or performance.

Biggest Active ETFs

In the active space, it seems that asset gathering success and performance don’t always go hand in hand.

The largest actively managed ETFs by assets are all competing in the fixed-income space: the Pimco Enhanced Short Maturity Strategy (MINT | A), with $4.25 billion in assets; the Pimco Total Return ETF (BOND | B), with $3.98 billion; and the $1.42 billion WisdomTree Emerging Markets Corporate Bond ETF (ELD | B), with $1.71 billion.

These three funds are by far the stars in the asset-gathering game, being the only actively managed strategies that have attracted more than $1 billion in assets.

MINT became the largest actively managed ETF earlier this month, when jittery fixed-income investors loyal to the Pimco brand took duration risk off the table in anticipation of the Federal Reserve’s “tapering” measures. The fund is a money-market proxy, and holds a mix of high-quality global debt with durations primarily in the zero- to one-year period. BOND, meanwhile, comprises investment-grade bonds, and focuses primarily on the three- to 10-year duration window.

Both funds, under the careful watch of Bill Gross, have been huge asset-gathering successes in the active segment of the ETF market—even in a year like 2013, when so many investors have bailed out of bond funds. The funds’ performance on a price basis alone has hurt—MINT's share price is down 0.1 percent year-to-date, while BOND's price has bled 3.2 percent in the same period.

But once dividends are taken into account, the total return based on net asset value for MINT year-to-date is a positive 46 basis points, and BOND's total return is a negative 153 basis points, or 1.53 percent, according to Pimco data.

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