3 Active ETFs With Potential To Outperform

Actively managed ETFs have struggled to gain traction, but these three ETFs show promise.

Senior ETF Analyst
Reviewed by: Sumit Roy
Edited by: Sumit Roy

When it comes to ETFs, active management is still small potatoes. Of the $2.4 trillion in U.S.-listed exchange-traded funds, only a fraction is in actively managed products.

According to the ETF.com Active Management channel, there are currently 161 active ETFs on the market with combined assets of $27.7 billion, or 1.2% of total ETF assets (for comparison, active funds account for 86% of total mutual fund assets).

Of those 161 active ETFs, the majority are tied to fixed income―nine of the top 10 active ETFs by assets are fixed-income ETFs.

The active ETF space is also top-heavy, with the 10 largest active ETFs holding a combined $18.8 billion in assets under management (AUM), compared with $8.9 billion for the other 151 ETFs.

Active ETF Struggles

There are plenty of reasons why active ETFs haven't taken off. Daily disclosure requirements that have kept big-name portfolio managers away and competition from "smart beta" products are a few reasons active management hasn't made a splash in the ETF world.

Poor performance is another factor why some investors may be turned off by actively managed ETFs. As the data clearly show, most active managers fail to beat their benchmarks year in and year out.

SPIVA, a report that measures the performance of active funds against S&P indexes, suggests that more than 90% of active domestic equity fund managers failed to beat their benchmarks during the past year. For international equity and fixed-income fund managers, the numbers are only slightly better.

Active MLP ETF Trounces Passive Competition

Still, despite the higher fees and the difficulty of outperforming passive benchmarks, some actively managed ETFs are doing quite well.

For example, the actively managed First Trust North America Energy Infrastructure Fund (EMLP) is up 26.5% year-to-date. That's more than double the gains for passive rivals such as the Alerian MLP ETF (AMLP) and the J.P. Morgan Alerian MLP Index ETN (AMJ).

YTD Returns For EMLP, AMLP & AMJ

With $1.4 billion in assets, EMLP is the fourth-largest fund in the complicated MLP ETF space. Unlike many competing products, the ETF only holds 25% of its portfolio in MLPs, and the rest in stocks of other non-MLP energy infrastructure companies.

Thanks to this different structure and the fund's management, EMLP has outperformed not just this year but since inception. Since June 2012, the EMLP has returned 45%, compared with 9.1% for AMLP and 8% for AMJ.


Research-Driven Active Utilities ETF

The Reaves Utilities ETF (UTES) is another outperforming active fund. Low yields helped power utilities to hefty gains this year, making it one of the top-performing stock market sectors of 2016.

Broad passive ETFs tied to the sector such as the Utilities Select Sector SPDR Fund (XLU) and the Vanguard Utilities Index Fund (VPU) have done well, gaining 13.6% and 14.2%, respectively, year-to-date. But UTES has done even better, returning 15.2%, albeit with a higher expense ratio of 0.95%.

YTD Returns For UTES, XLU & VPU

Though Reaves Asset Management is new to ETFs, the firm has been investing in the utilities sector for decades through separately managed accounts, closed-end funds and mutual funds.

Reaves' research-driven approach to utilities is working so far for UTES, but it's worth mentioning that the ETF is small, with only $14 million in assets. It's also fairly young, at just over one year old. Since its inception in September of last year, UTES is up 21.6%, compared with 18.9% for VPU and 17.4% for XLU.

Active Bond ETF With Star Portfolio Manager

No overview of the active ETF space would be complete without a mention of a fixed-income product. In this area, one of the most popular and promising is the SPDR DoubleLine Total Return Tactical ETF (TOTL).

Managed by the outspoken Jeffrey Gundlach, TOTL has a mandate to simply maximize total return. The fund invests in everything from Treasurys to mortgage-backed securities to bank loans to local and U.S.-dollar-denominated emerging market debt.

Year-to-date, TOTL is up 5.1%, matching the return for the iShares Core U.S. Aggregate Bond ETF (AGG). Though the ETF has yet to outperform since its relatively recent launch last October, the $3 billion that's already come into the fund suggests that investors are hopeful that under Gundlach's guidance, TOTL will eventually beat its passive counterparts.  

YTD Returns For TOTL & AGG

Contact Sumit Roy at [email protected].



Sumit Roy is the senior ETF analyst for etf.com, where he has worked for 13 years. He creates a variety of content for the platform, including news articles, analysis pieces, videos and podcasts.

Before joining etf.com, Sumit was the managing editor and commodities analyst for Hard Assets Investor. In those roles, he was responsible for most of the operations of HAI, a website dedicated to education about commodities investing.

Though he still closely follows the commodities beat, Sumit covers a much broader assortment of topics for etf.com, with a particular focus on stock and bond exchange-traded funds.

He is the host of etf.com’s Talk ETFs, a popular video series that features weekly interviews with thought leaders in the ETF industry. Sumit is also co-host of Exchange Traded Fridays, etf.com’s weekly podcast series.

He lives in the San Francisco Bay Area, where he enjoys climbing the city’s steep hills, playing chess and snowboarding in Lake Tahoe.