New Actively Managed ETFs Are Flawed
Investors have shown time and again that when it comes to exchange-traded funds, transparency and low costs trump management. For now, investors seeking active management are sticking with the mutual fund industry, but that’s not stopping Wall Street firms from launching actively managed ETFs. However, as these newcomers enter the ETF game, many largely disregard the qualities that have made ETFs so successful.
With over 900 products on the market and more than $1 trillion in assets, it is no wonder that an increasing number of dominant Wall Street players have announced plans to enter the expanding ETF arena. Some companies, such as Goldman Sachs (GS), Eaton Vance (EV) and T. Rowe Price, are still awaiting approval to launch their first products, while others, such as PIMCO and Schwab (SCHW), have already released a number of products in the past year.
On Thursday, JPMorgan (JPM) joined the bandwagon when it announced its own plan to launch a collection of exchange-traded funds. The firm already offers the popular JPMorgan MLP Alerian Index ETN (AMJ), a fund I have long promoted as a stable play on the natural gas industry.
As evidenced by February’s NSX data, the exchange-traded fund industry is still dominated by the likes of Blackrock (BLK), State Street (STT) and Vanguard, whose products largely reflect the original three tenants of these instruments: transparency, passivity and low costs.
Despite seeing the past success of these traits, a common trend highlighted by this wave of ETF newcomers is the desire to launch actively managed products.
Though long touted as the future of the exchange-traded fund industry, for the most part, actively managed ETFs have failed to develop much of a following. For instance, Grail Advisers, viewed as a pioneer in the industry, has seven different active ETFs currently available, but has only managed to accumulate a combined total of $25 million in assets.
Grail’s meager following leads one to wonder why so many of these newcomers are still confident that active instruments are a sure-fire way to gain a presence in the ETF industry.
Of course, not all active fund launches have been as unsuccessful. Pimco’s PIMCO Enhanced Short Maturity (MINT) stands out as an actively managed product that has actually managed to gather some steam. Since its launch in late 2009, the fund now boasts $136 million in assets.
As I highlighted in my RealMoney blog earlier this week, what sets MINT apart from its struggling competitors could be the fund’s inherent “angle.” When investors think of Pimco, the first things that come to mind are bonds and Bill Gross. The fact that the Pimco name is synonymous with this specific market slice and active management provides the company with an ideal opportunity to parlay that notoriety into the actively managed ETF realm.
The true test of this theory, however, will be if the firm’s other two actively managed instruments, the PIMCO Short Term Muni Strategy (SMMU) and PIMCO Intermediate Muni (MUNI) can garner the same following. Currently, like other actively managed instruments, the two funds have struggled to attract assets.
As evidenced by Pimco’s MINT, active ETFs, when properly marketed, can prove to be successful and attractive investing vehicles. However, for now, it would be in the best interest for newcomers who do not have the same well-defined “angle” as Pimco to stick to continuing the passive ETF tradition.
Of course, it’s possible that companies may not be jumping into actively managed instruments to get a jump on the next wave in ETF products. Instead, the focus on actively managed ETFs may be due to the fact that the passive ETF market is becoming saturated.
This week we saw a number of new instruments that simply mimic other funds already available. The SPDR S&P Russia ETF (RBL) will compete directly with the Market Vectors Russia ETF (RSX), while the Claymore Wilshire 5000 Index ETF (WFVK) will follow an index similar to that of the SPDR Dow Jones Total Market ETF (TMW). Active management may just be the one slice of the ETF realm that still has lots of space for new products.
