As of this year’s second quarter, TTAC had $87.3 million in assets and carried a 0.59% expense ratio. The fund had one-year trailing returns of 20.8%, well above the S&P 500, which returned 14.4% over the same period.
Even Vanguard has acknowledged that its new active ETFs are only nominally active, with most of the decisions being made quantitatively instead of with manager discretion.
“It’s really just the nature of these strategies to rely less on manager discretion because they are systematic and rules-based in nature,” says Picca. “We don’t have the discretion of a stock picker. We’re being as active as possible within these rules-based strategies.”
Johnston posits that managers like Picca will exercise very little discretion over the funds, and adds that many active fund managers are merely “closet indexers.”
In the mutual fund space, a closet indexer is an active manager whose portfolio resembles a market-cap index. That means the end investor could end up with overpriced exposure to a benchmark.
Chris Davis, president and CEO of Davis Funds, says that for a fund to be truly active it needs to be highly differentiated from passive benchmarks because of a reliance on manager conviction.
Davis Funds was known for its mutual funds, variable annuities and separately managed accounts before the company launched its first actively managed ETFs in January 2017—the Davis Select U.S. Equity ETF (DUSA), Davis Select Financial ETF (DFNL) and Davis Select Worldwide ETF (DWLD). Earlier this year, the company expanded its actively managed lineup with the Davis Select International ETF (DINT).
Davis Funds takes a let-it-all-hang-out approach to ETFs with fully transparent portfolios, and it has no fear of exposing its portfolio holdings daily, as is required with ETFs. But as the company acknowledges, that’s easy for it to do because it does long-term investing with little turnover, so it’s not concerned about sophisticated investors front-running its trades.
Blurred Lines
“The Vanguard products are different from other actively managed ETFs,” says Todd Rosenbluth, senior director of ETF and mutual fund research at CFRA research. “They’re more akin to smart beta products from iShares, Invesco and J.P. Morgan and others, except that they’re active in implementation as opposed to rules-based in implementation.”