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.

SSgA’s Active SRLN

A distant fourth in terms of assets, but one that has been climbing the asset ladder at an impressive rate, is the SPDR Blackstone/GSO Senior Loan ETF (SRLN), which has gathered more than $526 million in less than six months.

The fund, which came to market in April, offers exposure to noninvestment-grade, floating-rate senior secured debt of domestic as well as international companies that resets in three months or less. It competes in what’s been a hot pocket of the market anchored by two passive strategies—Highland’s (SNLN | C) and PowerShares’ (BKLN | C).

By design, SSgA’s SRLN sets out to outperform the indexes tracked by SNLN and BKLN by holding many of the same loans comprising the benchmarks of its rivals, but by buying these loans before they’re listed in the indexes and selling them before they’re dropped, according to ETF analytics data. What’s more, SRLN also looks at relative valuation of index constituents, and its strategy is not constrained to U.S.-only debt.

While its rise in the asset ranks has been notable, its performance has been a bit weak. Year-to-date, the fund has tallied losses of 0.2 percent, even if in the past month, it has managed to climb nearly 0.1 percent. By comparison, its massive passive competitor, the $5.6 billion BKLN, has slipped 0.7 percent year-to-date, and rallied 0.45 percent in the past month, while the $108 million SNLN is down 0.9 percent so far in 2013.

In the past year, only one in every 10 actively managed ETFs has tacked on gains of more than 20 percent, according to data compiled by IndexUniverse.

Funds like the Columbia Select Large Cap Value (GVT | C-61) and the Columbia Select Large Cap Growth (RWG | C-54) are leading the one-year performance charts with gains of more than 29 percent each in the past 12 months, and have been stellar performers so far in 2013 as well. By comparison, the SPDR S&P 500 (SPY | A-99) has rallied 20 percent in the same period.

As the names suggest, both GVT and RWG focus on U.S. large-cap companies, but GVT hones in on undervalued securities with good earnings growth potential, while RWG invests in stocks deemed to have above-average growth expectations. Despite the solid returns in recent months, neither fund has surpassed $10 million in assets. They were both launched in 2009.

The AdvisorShares TrimTabs Float Shrink ETF (TTFS | C-72) is another equities fund that stands out in terms of performance, with gains of some 24 percent in the past year, but more impressively, of 32 percent so far in 2013—making it one of the best-performing active managed ETF year-to-date.

TTFS is an equal-weighted strategy that sets out to outperform the broad U.S. stock market. The fund picks stocks based on three trends over the past 120 days: decreasing outstanding shares; increasing free cash flow; and shrinking leverage, according to IndexUniverse ETF Analytics.

By design, the first trend effectively makes TTFS a buyback fund, and one that, due to its equal-weighting and other metrics, shows a bias away from large-cap stocks, and minimizes single-stock exposure risk.

Still, TTFS has gathered less than $70 million in assets in two years.


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