Active ETFs Still Leading Passive Rivals

March 17, 2009

After beating their index-based rivals in the second half of 2008, active ETFs are continuing to score big gains.


The last time we did a scorecard of how the first set of active stock exchange-traded funds was performing came just after the trio had hit the ripe old age of three months.

Since that time, one other has appeared—the PowerShares Active U.S. Real Estate Fund (NYSE: PSR). But the beat remains the same. Namely, the active stock ETFs are still running ahead of their closest passive competitors, in some cases by as much as 5 percentage points.

That comes after similar patterns of outperformance in the second half of 2008. (See earlier "Active ETFs Opening With A Bang" here.)

Although the period studied this time—the past three months and yearly through last Friday—is quite short, we intend to keep monitoring the emergence of active portfolios in the ETF marketplace. As such, this report isn't intended as a summary of these funds' pluses and minuses. Instead, we're trying to keep a running tally of how they're doing using different snapshots in time as reference points.

No doubt the list will grow. But for now, PowerShares remains the only provider so far to venture onto the market with actual "active" monikers (although several new filings have come out).

With the this week's news that SPA is going to close its MarketGraders funds, six of the most quasi-active ETFs with quantitative methodologies are soon to disappear. (See related story here.)

That leaves more active quant-based families such as the PowerShares Intellidex series and First Trust's AlphaDex enhanced index ETFs as the closest competitors in the active field.

But they still don't match the four street-legal PowerShares funds in terms of freedom to trade. And they also still track some sort of benchmark, which the PowerShares portfolios don't directly try to do. So let's take a glimpse of how these active ETFs are faring. (See table below.)

Mega-Cap Land

Since its inception, the PowerShares Active Mega Cap Fund (NYSE: PMA) has leaned less heavily to the biggest of the big in mega-cap land. Those tended to be the best performers in large-cap stocks last year, and that outperformance has continued into 2009.

So far this year through March 13, PMA had outdone its two closest index-based ETF competitors by around 2-3 percentage points. In the past three months, PMA's margin of victory ranged from about 3.5% to 5%. In particular, its two most direct competitors in terms of passive index-based ETFs seem to be the iShares S&P 100 Index (NYSE: OEF) and the Vanguard Mega Cap 300 Index (NYSE: MGC).

The PowerShares Active Mega Cap Fund is run by parent Invesco's institutional managers. Their favorite 30 or so mega-cap stocks go into the portfolio, which tries to outperform the Russell Top 200 index. For the year, it's down about 18%—nearly 5 percentage points more than PMA—and almost 17.50% in the past three months, about 4.5 percentage points worse.

But a direct comparison to passively run mega-cap ETFs might prove difficult. As is the case with actively managed mutual funds, style drift seems to be a factor here. In the case of PMA, its average market cap size is much below that of both OEF and MGC. (PMA is at slightly more than $48 billion, while PMA's around $53.3 billion and OEF's at $65.6 billion.)

Interestingly, the Russell 2000 Top 200 Index has an average market cap of about $82 billion. All are still much bigger than the SPDRs S&P 500 ETF (NYSE: SPY), which sits at about $31.7 billion.

Comparing the smaller-sized MGC to PMA shows some sector weighting differences. In particular, PMA has significantly more exposure to: Energy (21.7% vs. 14.40%); Health Care (25.17% vs. 16.40%) and Tech (31.77% vs. 17.90%). PMA has much less exposure than MGC to: Consumer Staples (6.56% vs. 13.80%); Financials (6.84% vs. 9.90%) and Industrials (1.79% vs. 8.70%).

So clearly, if you want a mega-cap fund that actively can slide up or down the market-cap spectrum a bit within mega caps, PMA fits that bill.

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