Actively Managed ETFs Seek Bigger Footprint

May 09, 2014

With all sorts of innovations, strategies and would-be issuers gathering at the gates, will actively managed ETFs finally get a true foothold in the marketplace?

[This article opriginally appeared in the May issue of ETF Report.]

Scuttlebutt in the ETF industry is full of predictions about how already-rapid growth in the world of U.S-listed exchange-traded funds is likely to accelerate in the coming years. Behind much of that optimism is the belief that active ETFs are the "next big thing" in the 21-year-old world of ETFs.

After all, the pure-index ETFs that began coming to market in the 1990s, beginning with the SPDR S&P 500 ETF (SPY | A-98), may have reached the zenith of their popularity, so the argument goes. Indeed, the low-cost, "pure beta" segment of the ETF market does seem pretty much accounted for by the likes of Vanguard, Schwab, State Street and even iShares, with its inexpensive lineup of "Core" ETFs.

Furthermore, the world of quasi-active "smart beta" funds built on indexes designed to beat the market from Research Affiliates and WisdomTree or even the PowerShares ETFs using Dorsey, Wright relative-strength screens, are now getting serious attention from investors, setting the stage, the soothsayers say, for bona fide active strategies to get serious traction as well.

"There is a population that will always want to try to get some alpha, and they can use these 'active' smart-beta strategies," said Deborah Fuhr, an ETF industry analyst who runs the London-based consultancy ETFGI. She stressed that broadening the definition of what constitutes active management is crucial to fully understand and take measure of the still-developing active ETF phenomenon.

Fuhr said those who choose active ETFs are probably not the same investors who have used the index-based ETFs that have been popular so far. But she was reluctant to prognosticate to what extent active ETF adoption would accelerate.

"Transparent" active ETFs already exist, though they haven't yet taken off in any meaningful way in terms of assets under management. A total of 85 actively managed ETFs are now listed in the U.S., or about 5% of the 1,570 U.S. ETFs (Figure 1). But less than 1% of the $1.7 trillion in ETF assets are in active ETFs, which are "transparent" in that they must disclose portfolio holdings daily.

Active Bright Spots
The most successful active ETF strategies to date have been focused on fixed income, and the two biggest, both from Pimco (Figure 2), command about half of the $15 billion now invested in active ETFs. Those are the $4 billion Pimco Enhanced Short Maturity Strategy Fund (MINT | A), the No. 1 active ETF, and Bill Gross' $3.42 billion Pimco Total Return ETF (BOND), the ETF version of his Pimco Total Return Fund, the mutual fund behemoth that has $236 billion in assets.


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