(Dow Jones) A parade of big-name mutual fund companies have filed paperwork to launch actively managed exchange-traded funds, but it could take years before any of them attract significant interest from investors.
For the past decade, even as the market for ETFs grew to $700 million, they remained the province of a small handful of firms that were largely known for investments that mimic market benchmarks. The mainstream of the mutual fund industry, companies that hire portfolio managers and researchers to pick attractive stocks, have been on the sidelines.
Now that's beginning to change. Since late last year, companies have lined up before the Securities and Exchange Commission to launch exchange-traded funds, especially actively managed ETFs, vehicles first permitted by the SEC about two years ago. Among the wannabes: T. Rowe Price Group Inc., John Hancock, Legg Mason Inc., Eaton Vance Corp., J.P. Morgan Chase Co. and Goldman Sachs Group Inc.), which plans more conventional index ETFs.
While all this suggests dramatic change is coming to the ETF business, the complexity of the review process and the length of time it typically takes active funds to build winning track records suggest it could still be years before these developments are obvious to casual observers.
"It's a hurry-up-and-wait situation," says Morningstar analyst Scott Burns.
Companies often wait 10 to 12 months for the SEC to approve a first fund. The process is more complicated than with conventional funds because elements of an ETF's design require special exemptions from the laws that govern how funds conduct business. At the very least, that means the earliest investors are likely to see a flesh-and-blood ETF from one of these big-name companies is this fall.
Even when the funds do appear on the market, they will likely face a long slog before they achieve prominence in the ETF industry, if they do at all.
Index ETFs that meet pent-up investor demand sometimes become instant hits, collecting hundreds of millions of dollars in their first year. But that's because investors largely know what to expect: Typically they're already familiar with the fund's benchmark. By contrast, active funds have to convince potential investors their strategy will beat other options, a case that usually requires at least a three-year track record and a so-called "star rating" from Morningstar based on those results.
Those credentials are something the first slate of active stock ETFs, launched by Invesco Ltd.'s PowerShares unit in April 2008, are still waiting to attain. Meanwhile, investors have mostly ignored them. Together these four funds have less than $50 million.
There are a couple of scenarios where fund companies could take an ETF short cut. One is to copy Vanguard Group, which operates ETF- and conventional-fund share classes of many of its index funds, a process the company says it has patented. Another might be to convert an existing open- or closed-end mutual fund into an ETF, a strategy currently being tried by San Francisco-based Grail Advisors LLC.