Actively managed ETFs before the boom

By Ross Ellis – Many have associated exchange traded funds as purely passive, beta-indexing tools for basic market exposure. To date, this has been generally true, but the rise of active management in the ETF space may well be the next step in the evolution of the investment vehicle.

As actively managed ETFs attract greater attention and accumulate more investors, the vehicles may start competing with traditional active mutual funds for market share. Indeed, while actively managed exchange-traded funds may now be in their infancy, McKinsey & Co thinks that “active ETFs have major momentum” and expects them to “grow faster than their passive brethren” over the next several years.

Actively Managed ETFs:

  • Are growing in terms of AUM and number of products, but still make up less than 1% of the global market for ETFs today;
  • Come with a unique creation/redemption process that allows for a potentially more tax efficient product than mutual funds;
  • Are required to disclose holdings on a daily basis, forcing asset managers to question whether such products can succeed with full portfolio transparency – yet some providers have petitioned to increase the time interval beyond daily disclosures;
  • May now more broadly utilise derivatives, enabling fund sponsors to expand to other asset classes, such as commodities and currencies; and
  • Are now being considered by the more traditional mutual fund-only providers rather than just specialist ETF manufacturers.

Actively managed ETFs have garnered greater attention after the successful adaptation of PIMCO’s Total Return mutual fund into the PIMCO Total Return Bond ETF. Having gathered close to USD5billion since its launch in 2012, it is by far the world’s largest actively managed ETF.

Yet while there have been some notable successes, active ETFs still remain a minuscule portion of total ETF assets, consisting of a mere 56 ETF products, controlling USD12.6billion in assets under management (as of mid-March, 2013). Collectively, US-listed actively managed exchange-traded products and those listed on overseas exchanges together represent less than 1 per cent of the global market.

Nevertheless, the actively managed ETF space has been gaining traction since the first active ETF was launched in 2008. Currently, there are 952 ETFs in registration with the SEC; of that number, there are approximately 40 active ETFs that are either in registration or, if having already received approval, have yet to come to market. Adding wind to the industry’s back, the SEC’s lifting of restrictions on derivatives in active ETFs may be the catalyst behind a new wave of active offerings.

While the actively managed ETF space is still in its nascent stages, active management may represent the next growth phase in the ETF industry. Indeed, in a Cerulli Associates survey earlier this year, 57 per ent of ETF sponsors interviewed said they plan on developing active fixed-income ETFs, with 37 per cent planning on developing active equity ETFs. The asset management industry is one founded on innovation and ingenuity, and with increasing interest in ETFs overall, we expect to see greater growth and creative solutions-orientation with active ETF offerings over the coming years.

As market participants become more educated with the nuances and benefits of these new and innovative wrappers, active ETFs may well develop to be the gateway for managers seeking to break in to the ETF business and eventually rival traditional active mutual funds for market share.

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