Assets remain low, but interest abounds, and a game-changer is ahead.
As exchange-traded funds have exploded in popularity among investors, a small corner of the ETF world--actively managed ETFs--continues to command outsize attention from investment companies but less investor interest thus far.
Active ETFs do not passively follow an index and instead employ actual portfolio managers who either use rules-based strategies or make portfolio calls based on a stated qualitative strategy.
At present, just $5 billion of the current $1 trillion-plus that is invested in ETFs is invested in actively managed funds. Additionally, well more than half of that $5 billion is soaked up by just three ETFs--PIMCO Enhanced Short Maturity Strategy ETF
Clearly, then, the hype over active ETFs has not yet been matched by asset flows. However, for those who are drawn to the benefits of the ETF structure--their tax efficiency, their greater transparency than open-end mutual funds, their generally lower costs than traditional mutual funds, and the ability to trade them all day long--active ETFs are likely to represent an attractive option for investors in the future, as large money managers roll out more and more strategies in the active-ETF wrapper. And given how many major investment managers--including traditional open-end mutual firms--have filed for regulatory permission to issue active ETFs, we unquestionably will see more such products issued in the months (and years) to come.
What's more, a sea change may well be ahead for the entire fund industry, with the blockbuster announcement several months ago of by PIMCO that it intends to launch an actively managed ETF version of its massively popular Total Return strategy. Until now, few name-brand mutual-fund managers have ventured into active ETFs. All that changed in April, when PIMCO filed to launch the actively managed PIMCO Total Return ETF
What active-ETF strategies are investors currently using?
Up to now, active ETFs have developed the most traction with investors in the fixed-income, money markets, and global macro arenas. Short-maturity debt ETFs and foreign local-debt funds far and away are the largest actively managed ETFs out there right now. Other active strategies that have begun gaining investor attention include fund-of-funds ETFs like Russell Equity ETF
Transparency fears: Front-running, shadowing
The notion of full, daily transparency of an ETF's holdings--as is customary in the ETF world--has been a sticking point for traditional mutual fund managers in their resistance to venturing into the active-ETF space. Managers typically cite two fears: investors "front-running" their decisions, or trading in advance of them--presumably at a more favorable price--and investors "shadowing" them, or making identical portfolio moves on their own, without actually investing in the ETF.
We have found neither argument to be especially persuasive. We view front-running to be a bit of a straw man argument because most mutual funds already are at monthly disclosure, and front-running already is going on anyhow in the marketplace, in the form of flash trading and high-frequency traders. We also consider shadowing to be both presumptuous and time-consuming on the part of investors.