For years, a raucous debate has raged between proponents of active and passive investment management. Since Jack Bogle's Vanguard Group launched the first retail index tracker in 1976, most of the skirmishing's occurred in the mutual fund space.
The proliferation of exchange-traded portfolio products in the early 2000s, however, caused the battle lines to be redrawn. Active mutual fund managers then were faced with competition from institutional heavy hitters such as Barclays Global Investors, the sponsor of iShares exchange-traded funds (ETFs) and later by dozens of other investment management firms offering exchange-traded products of their own. Most recently, the circle has closed with the introduction of actively managed ETFs.
There's just a handful of active ETFs on the market currently, but a battalion awaits registration as investors hunger for market-beating returns. Before getting too excited about the new active offerings, though, alpha-seeking advisors owe it to their investors to check on the existing portfolios' performance to see what they've actually delivered. Have they, in fact, beaten the market? If so, at what cost?
The track records for these products are short, so any attempt at analysis needs to be creative. First of all, weekly rather than monthly data points need to be employed to produce meaningful statistics. In-depth analysis of the entire marketplace is beyond the scope of this article, so we'll confine our examination to equity products and save the parsing of actively managed debt portfolios for another day.
Given the history of exchange-traded products, we ought to expect the price of active management to be lower in the ETF format than in mutual funds. After all, there's more overhead in a mutual fund operation. Exchange-traded products devolve shareholder relations onto financial intermediaries while mutual funds interface directly with investors. Higher accounting, record-keeping and investor relations costs are built into mutual fund pricing. As we'll see, there's as much variance in active ETF fees as there is among mutual funds.
Active Equity ETF Universe
There are ten products in the universe-the oldest ones launched in April 2008, the most recent floated in October 2010.
The Cambria Global Tactical ETF (NYSE Arca: GTAA) is a classic active portfolio introduced in October 2010 by Maryland-based AdvisorShares. GTAA is a momentum-following fund of funds that invests in a spectrum of asset classes, including U.S. equities, foreign equities, U.S. bonds, foreign bonds, U.S. real estate, foreign real estate, currencies and commodities. The portfolio is either fully invested in an allocation or defensively goes to cash when momentum for that class reverses from upside to downside. Despite its youth, GTAA makes up more than 70% of the active equity ETF market with $171 million in assets.
GTAA is a reactive portfolio; no effort is made to forecast future market trends or direction. Stylistically, the GTAA portfolio represents the investment approach of the Yale and Harvard university endowments, which attempt to provide equity-like returns through a mix of non-correlated assets.
Another AdvisorShares offering, the Dent Tactical ETF (NYSE Arca: DENT), is an ETF of ETFs that employs a proprietary model to weight portfolio allocations according to demographic trends. Investable asset classes include domestic and foreign equities and domestic and foreign fixed income together with commodities.
DENT was floated in September 2009 and recently clocked in with nearly $17 million in assets.
Introduced in July 2010, the $12 million Mars Hill Global Relative Value ETF (NYSE Arca: GRV) splits its dollar commitments equally between long positions in attractive global markets and short positions in the least appealing segments. Like the other AdvisorShares portfolios described above, the GRV portfolio is an ETF of ETFs.