People have speculated in the past whether actively managed exchange-traded funds can play a bigger role in the future. At present, that certainly hasn’t been the case. But recent activity indicates that might be changing.

An underlying question is whether investors really even care. After all, ETFs have been synonymous with low-cost, index-based passive investing, and those attributes have set apart ETFs from actively managed mutual funds which generally have higher fund expenses. And on the whole, the current crop of active ETFs sport much higher expense ratios than passive ETFs.

“One of the main reasons people like passive ETFs is because of their low costs, says Barry Fennell, senior research analyst at Lipper. “Many investors looking for actively managed funds are inclined to go with active mutual funds because they know the management teams and are willing to pay for it.”

As of the end of July, there were 92 active ETFs holding $16.4 billion in assets, according AdvisorShares, an ETF sponsor specializing in active funds. That’s just a drop in the bucket in the overall ETF space, which through July comprised more than 1,400 ETFs with more than $1.8 trillion in assets under management.

Fixed income has dominated the active ETF market, thanks in part to the hugely successful Pimco Total Return ETF (BOND) and Pimco Enhanced Short Maturity ETF (MINT) funds that are take-offs on the company's popular Total Return and Short-Term actively managed fixed-income mutual funds.

To date, fixed income has ruled among active ETFs because it’s harder for investors to front run fixed-income strategies due to the way the bond market works––a big consideration given the daily transparency of ETFs. But such transparency worries purveyors of traditional equity mutual funds––which report their positions quarterly––and has made them unwilling to roll out their own ETFs because they fear investors will exploit that transparency by mimicking or front running the fund’s positions, which they claim will harm the funds and their investors.

EatonVance and T. Rowe Price are among the traditional mutual fund managers seeking approval from the Securities and Exchange Commission for non-transparent active ETFs.

In Eaton Vance’s case, it has proposed a new exchange-traded managed funds (ETMFs) structure that would employ net asset value (NAV)-based trading. Under this structure, fund shares would be purchased and sold on an exchange throughout the trading day at market-determined spreads to the fund's ending NAV on that day. This format is designed to facilitate trading without the need for portfolio transparency.

Eaton Vance acquired the rights to this structure from ETF pioneer Gary Gastineau. Through its Navigate Fund Solutions subsidiary, it aims to commercialize the strategy both by creating ETMFs that mirror Eaton Vance’s existing mutual funds and by licensing it to other fund groups.

Elsewhere, leading ETF providers BlackRock, State Street Global Advisors and Invesco PowerShares, along with mutual fund industry heavyweight Capital Group’s American Funds, have filed for SEC approval for non-transparent, actively managed ETFs using a patented strategy developed by Precidian Investments that employs a blind-trust structure.

Precidian, based in Bedminster, N.J., also has filed with the SEC to launch its own active ETFs. None of the above-mentioned applications have been approved yet.

Comparable Early-Stage Growth

“People are always asking when are active ETFs going to take off. Well, they’re taking off,” says Noah Hamman, founder and CEO of AdvisorShares. “People forget that index ETFs started slow during the industry’s first handful of years, but have grown tremendously since.”

Indeed, a chart provided by AdvisorShares shows very similar growth patterns between index and active ETFs during each camp’s respective first six years of existence (the first active ETFs began trading in 2008).

Among the current roster of active ETF providers, AdvisorShares’ 26 active ETFs leads the pack by a country mile. The company sponsors active managers with distinctive strategies across a range of asset classes. Among them are funds based on behavioral finance, business cycles, accounting red flags and volatility.

“Smaller companies like AdvisorShares need products that stand out because coming out with just another stylebox fund won’t generate a lot of interest,” Hamman says. “I do think some of the bigger, well-known firms can build more traditional active products and people will be more open to them because they’re more familiar with that brand.”

Perhaps, but it remains to be seen if established mutual fund companies will ever fully participate in the active ETF space.

“At the end of the day it [rolling out active ETFs] would cannibalize their existing core mutual fund business," says Lipper’s Barry Fennell. “The core product lineup of big fund shops have much higher total expense fee ratios that generate a lot of revenue, so it doesn’t make sense from a business point of view to offer low-cost ETFs with an active twist unless they feel the need to maintain market share or other business reasons.”