Actively managed ETFs have higher fees than your normal index fund expense ratios, so investors expect actively managed ETFs to outperform or beat the market. As with any fund, that potential outperformance comes down to just how good the underlying managers are. Just as in the mutual fund world, there are plenty of stinker funds. However, there are managers and active ETFs that have beaten their respective benchmark indexes consistently – some by a wide margin.
For example, the Peritus High Yield ETF (HYLD), which bets on junk-bonds, beat its rival iShares iBoxx $ High Yield Corporate Bond (HYG) by almost 3% in 2012. It also pays a much higher dividend.
Another example is the aforementioned Pimco Total Return ETF. The fund’s smaller size has allowed Bill Gross to be more nimble, which has translated to big returns. The fund has returned roughly 11% since its launch in February 2012.
The Bottom Line
For investors, there is a lot to like about active ETFs––lower expense ratios, lower initial investments and professional management make them perfect substitutes for mutual funds. The active management can result in higher and benchmark-beating returns, but investors need to take a close look under the hood of all of their ETF options to find the perfect balance of risk, reward and costs before investing.
Aaron Levitt writes for ETFdb, which offers a comprehensive and original ETF database and analytical consulting services for advisors and investors, as well as a free newsletter. Learn more about their services by visiting ETFdb.com. Disclosure: the author had no positions in the securities named in this article at the time of writing.