“Some of these new strategies sound great, but what’s the benefit to it in an ETF format and will they be able to communicate these ideas downstream from asset managers to financial advisors and investors where they’ll feel comfortable jumping into that space,” Lemieux says.
According to Lemieux, the only active ETFs with at least $1 billion in assets are the Pimco Total Return ETF (BOND), the leader at roughly $5.2 billion as of the end of April, followed by the Pimco Enhanced Short Maturity ETF (MINT) at $2.8 billion and the WisdomTree Emerging Markets Local Debt Fund (ELD) at $2.0 billion.
Small, But Growing
At roughly $14 billion in AUM, actively managed ETFs currently comprise just a tiny slice of the overall ETF market of nearly $1.5 trillion. Pimco is far and away the largest active ETF provider in terms of AUM with nearly 60 percent market share, followed by WisdomTree (25 percent) and AdvisorShares (nearly 6 percent).
Based in Bethesda, Md., AdvisorShares’ M.O. is working with investment managers to bring their strategies to market in the form of ETFs. The company’s lineup of 18 active funds makes it the largest provider in the space in terms of product, and its funds include a variety of different approaches to equity, fixed income or alternative investing.
According to AdvisorShares, the growth of active ETFs since their inception in 2008 has been much more rapid than the growth of passively managed ETFs during their first five years after they were created in 1993. Of course, ETFs back then were brand spanking new and an unknown quantity among investors. By 2008, ETFs were well-established and active funds to some extent already had a built-in audience.
But as mentioned, investors have been slow to embrace active equity ETFs. Noah Hamman, CEO of AdvisorShares, believes one reason is that investors shop for bond products differently than they do equity products. With bonds, he posits, people crave the income and don’t really think about the product from a longer-term perspective; whereas equity investors are more concerned about how an investment will perform over a certain time horizon.
It’s also common knowledge that many financial advisors don’t want to be the first kid on the block to buy a new actively managed, equity-based ETF. Instead, they’re willing to wait until a fund can sport a three-year track record.
“I think the idea of waiting three years is a function of the old mutual fund model where there’s no transparency and the best way to feel out a portfolio and portfolio manager was over time,” Hamman says. “Active ETFs are transparent every day.”
Hamman expects active equity ETFs to catch on in greater volume as more funds hit their three-year anniversary. “It takes time,” he says. “People have to get educated on these products and be comfortable with them.”