Actively-managed exchange-traded funds still make up a tiny portion of the ETF universe and have a ways to go to win over industry veterans, according to a panel called “Remaking the ETF Landscape” at the Bloomberg Portfolio Manager Mash-Up event held earlier this month in New York City.
Although active ETFs are seen as a potential new distribution channel for mutual fund companies and have been talked about as an emerging investment vehicle for a while, the current number of 55 active ETFs comprises just 5% of total ETF assets.
Among the leading players in this trend are AdvisorShares, which offers 16 actively managed ETFs, and WisdomTree with its 14 active funds. Others include Pimco with its six active funds, and State Street Global Advisors’ three funds.
The panelists agreed both that ETFs have some advantages over mutual funds and that actively managed ETFs provide a raft of challenges for mutual fund companies who are contemplating entering the space.
A key takeaway from the panel is that it’s a struggle for some managers of actively managed ETFs to attract investors.
“It’s always challenging to attract new money because there’s so much uncertainty due to the political and macroeconomic environment that investors are staying on the sidelines,” said Alex Gurvich, managing partner of the Rockledge Group and portfolio manager of the $1.25 million Rockledge SectorSAM ETF (SSAM). “There’s a need for education around actively managed ETFs because many investors and advisors are still using mutual funds despite the advantages of ETFs.”
Rockledge applied its hedge fund like-strategy in separately managed accounts prior to launching SSAM early this year. The fund aims to create a dollar-neutral portfolio by holding equal amounts that are both long and short S&P 500 sectors while maintaining 50% cash in its holdings.
The cost structure of ETFs is more efficient than that of traditional mutual funds, which is why active managers, such as Pimco’s Bill Gross, have launched actively managed ETF versions of their mutual funds, said panel moderator and Bloomberg analyst Eric Balchunas.
Pimco’s actively managed Total Return ETF (BOND) and Enhanced Short Duration ETF (MINT) mirror the strategies used by fund manager Bill Gross in his pre-existing and popular mutual funds by the same name.
“Because of the unique operational structure of exchange-traded funds, many cost benefits can be realized at the fund level and passed through to shareholders resulting in lower expense ratios,” said Kevin W. Quigg, global head of State Street’s ETF strategy and consulting group.
However, the transparency of actively managed ETFs is a deterrent for some fund managers who are considering launching actively managed versions of their existing mutual funds.
“Most active equity managers don’t want what they are buying and selling to be known, so transparency can be a disadvantage,” panelist Joel Dickson, principal and senior ETF strategist with Vanguard, told Financial Advisor magazine. “We haven’t launched an actively managed ETF because of investment restrictions around derivatives, swaps and options and the disclosure requirements.”
To date, fixed-income products comprise the bulk of actively managed ETFs. Pimco claims the lion’s share of assets under management among all active ETFs with $5.8 billion compared to Wisdom Tree’s $2.7 million. AdvisorShares has $683 million and State Street has $48 million, according to an AdvisorShares report from October 31.
Financial advisors are a key potential market for active ETFs, but some advisors so far have been reluctant to dive in. Brian Parker, who manages $1.3 billion at EP Wealth Advisors in Torrance, Calif., said he currently doesn’t include actively managed ETFs in his investment strategy because they are in their infancy. “There are too few choices, especially in the equity space, but as the market matures we certainly will consider them for client’s portfolios."
State Street launched its three actively managed ETFs this past spring specifically for hesitant financial advisors who’ve resisted investing in actively managed ETFs. “We’ve introduced actively-managed ETFs that own other ETFs in a fund of funds structure that can be purchased by financial advisors," Quigg said, noting that the potential appeal for advisors is that these funds are managed similarly to traditional asset management.