Morningstars Ben Johnson winces when he hears people proclaim the year of the actively managed exchange-traded fund. Each of the past three years, he says, has been heralded as such by the financial media and industry watchers, including Morningstar. And that includes Institutional Investor as well.
Yet by now the sector has been around long enough that some winners have emerged beyond the two big whales of the actively managed segment: Pimcos Enhanced Short Maturity ETF (MINT), with $3.9 billion in assets, and its Total Return ETF (BOND), with $3.8 billion.
Making it into the top ranks of actively managed ETFs (see chart) means getting enough interest from investors to hit the $100 million mark in assets, the point at which an ETF is widely seen as having a shot at long-term viability. Out of 64 actively managed ETFs in the market with a combined total of $14.6 billion in assets as of September 30, according to Morningstar, only 18 managed to reach the $100 million mark. They included Pimcos third-largest contender in the category, the Intermediate Municipal Bond Strategy ETF (MUNI), with $199.5 million in assets, and a fourth fund, the Global Advantage Inflation-Linked Bond ETF (ILB), with $113.95 million in assets.
WisdomTree boasts the largest group of sizable actively managed ETFs, with six. The firm carved out a niche in emerging-markets debt and currencies, which according to Luciano Siracusano, WisdomTrees chief investment strategist, are difficult asset classes to access. WisdomTree also boasts a seventh ETF, its Brazilian Real Fund (BZF), which shot up by about $500 million, to $552.6 million, during October because of a single client who was interested in making a big bet on Brazil, he says.
|Name||ASSETS ($)||2013 YEAR-TO-DATE|
|MINT||Pimco Enhanced Short Maturity ETF||3.9 billion||0.57|
|BOND||Pimco Total Return ETF||3.8 billion||0.02|
Markets Local Debt Fund
|SRLN||SPDR Blackstone/GSO Senior Loan ETF||547.05 million||*|
|ALD||WisdomTree Asia Local Debt Fund||508.89 million||-4.15|
|GSY||Guggenheim Enhanced Short Duration ETF||476.52 million||1.16|
|EMLP||First Trust North American|
Energy Infrastructure Fund
|HYLD||Peritus High Yield ETF (AdvisorShares)||388.15 million||10.4|
|CYB||WisdomTree Chinese Yuan Fund||215.58 million||3.72|
|MUNI||Pimco Intermediate Muni Bond Strategy ETF||199.52 million||-2.19|
|CEW||WisdomTree Emerging Currency Fund||195.76 million||-2.17|
|HDGE||Ranger Equity Bear ETF (AdvisorShares)||184.84 million||-23.7|
|WDTI||WisdomTree Managed Futures Strategy Fund||145.23 million||2.52|
|RLY||SPDR SSgA Multi-Asset Real Return ETF||144.05 million||-1.65|
|SYLD||Cambria Shareholder Yield ETF||124.66 million||**|
|ILB||Pimco Global Advantage|
Inflation-Linked Bond ETF
|EMCB||WisdomTree Emerging Markets|
Corporate Bond Fund
|INKM||SPDR SSgA Income Allocation ETF||105.21 million||4.42|
| *Inception--4/4/13; YTD 0.91% per sponsor, State Street Global Advisors|
**Inception--5/14/13; YTD 8.85% per sponsor, Cambria Funds
So far, most of the actively managed ETFs that have been successful in attracting assets have been either bond or currency ETFs, because thats where active makes sense, says Paul Baiocchi, senior ETF strategist and vice president of ETF analytics at IndexUniverse. Without an index to follow, the managers of bond ETFs are not required to load up on the bonds of a large issuer, but can instead pick and choose bonds within the space that they believe are fairly priced, Baiocchi says. Its those pockets of the market where theres no central exchange, no clearing, where people start to believe real expertise is to be had, and therefore, theyre willing to pay higher fees for active management because the managers might be able to take advantage of mispricings, he says.
Some of the ETFs among the big 18 are particularly innovative, such as the First Trust North American Energy Infrastructure Fund (ELMP), the markets first actively managed infrastructure ETF. Launched in June 2012, it has produced a year-to-date return of 15.85 percent, the best in the sector, and has gained 14.24 percent since inception. The fund invests primarily in publicly traded master limited partnerships and in limited liability companies taxed as partnerships, as well as Canadian income trusts and other types of companies that derive at least half their revenues from energy infrastructure assets.
One of the big reasons there are not many equity ETFs in the actively managed space is that ETFs are required to mark their portfolios to market on a daily basis. With bond and currency ETFs, where trading is not centralized and transparent, this is not a major concern. But with actively managed equity ETFs, its a concern because moving in or out of a large position can take days of buying or selling on the open market, and meanwhile, other players, like hedge funds, can spot the trade in progress and jump in and trade against the ETF holder. With index-based ETFs, it is also not an issue since the holders know what is included in the portfolio anyway. . A number of would-be sponsors of actively managed equity ETFs have put proposals in front of the Securities and Exchange Commission for some sort of compromise, but so far, the SEC has yet to relent on its stance on daily transparency.
The one equity fund that made the list of the top 18 actively managed ETFs, the Cambria Shareholder Yield ETF (SYLD), is yield oriented, Baiocchi notes. It focuses on the 100 stocks that have more than $200 million in market cap and rank the highest in terms of paying dividends, engaging in net share repurchases and paying down debt. Launched in May 2013, its off to a promising start, with a year-to-date return of 8.85 percent and as of September 30, $124.66 million in assets.
In the actively managed universe, fund size outweighs performance in terms of attracting assets. The best-performing actively managed ETF is tiny by market standards: the $11.79 million Columbia Select Large Cap Growth ETF (RWG). It has gained a truly outstanding 37.05 percent so far this year. An ETF that small will usually fail to gain much attention from advisers, because most wire houses require an ETF to have a minimum of at least $50 million or $100 million in assets, Baiocchi says.
Theres no shortage of would-be sponsors. Presently, 15 firms sponsor actively managed ETFs. Another 35 firms have filed with the SEC to launch such funds, including big guns of the mutual fund world like Federated, Fidelity and T. Rowe Price, according to Morningstar. In terms of the burgeoning relationship between ETFs and mutual funds, the writing is on the wall as it relates to ETFs continuing to cannibalize mutual fund assets, says Baiocchi. And more and more mutual fund sponsors are realizing that if they are not providing products in the actively managed ETF space, they may fall behind, he says.
Read more about ETFs.