Hamman: Active ETFs On Track To Blast Off

May 13, 2011


Ludwig: Can you speak a bit about the Peritus High Yield ETF (NYSEArca: HYLD)? That launched in November of last year, right?

Hamman: Yes. I believe it still continues to be tops in performance in the high-yield category. It’s a management team we’re really excited about. If there’s a product that fits really well in the active space, it’s something like HYLD. When you look at the number of securities that are in HYG and JNK, they just have all these little time bombs in there. HYLD’s strategy can be far more nimble. It’s 20 to 50 positions.

Ludwig: The percentage of active to passive ETF funds is less than 1 percent of the $1.1 trillion in assets. And, if you look at equity as a percentage of the whole, active equity ETF assets are more miniscule. What’s going on here?

Hamman: We’re so jaded in this world today that if you don’t have 500 million Facebook followers, your business is a failure. We put together a chart where we compared the first three years of asset-gathering for index ETFs compared to the first three years of active ETF growth. And it’s a stark difference—in those three years, active ETFs have far more assets and far more products than index products did. It took index ETFs 15 years to get the success that they did. When you look at a 15-year term for index ETFs, it looks very, very flat, and then it hockey-sticks up. I think we’ll see the same thing for active ETFs.

More importantly for us will be three-year track records and Morningstar ratings. As much as that maybe shouldn’t be the case, we know that will be the case—it’s going to drive its own level of interest in some of these products.

Ludwig: I’m guessing you’re an advocate of active management, but did you catch the Larry Swedroe Q&A we published, where he came out swinging saying active management was a waste of time. People came out of the woodwork after that and got really worked up about that.

Hamman: I read it and I saw all of the comments, which were great. I would describe myself in a couple of ways. I’m absolutely for someone being in the driver’s seat in an investment strategy. And whether that driver is in a packaged solution like our Cambria product, GTAA, or whether it’s Larry who’s asset-allocating with passive ETFs for his clients. No matter what he says—even if he quarterly rebalances and that’s all he does—he still makes a time-based active decision on when to change his clients’ investment strategy. And whether he likes it or not, he’s active, he’s the active manager.

So, I’m not against passive, and I’m not against buy-and-hold. In our approach, we feel like you have to have a little bit of both. And obviously, given some of the products we have, we think using underlying passive baskets is a great way to formulate an active strategy, whether you’re doing it in a packaged solution like we are, or whether you’re doing it directly through your clients like Larry is. We just always feel like there should be someone in the driver’s seat.

Ludwig: So you’re staking out some kind of middle ground, and broadening the definition of what constitutes active management when you talk about Larry Swedroe and his quarterly rebalancings?

Hamman: Right.


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