Actively managed ETFs first burst onto the scene in 2009 and the going was tough at the start. Issuers of active ETFs initially had a difficult time capturing investors’ attention because actively managed ETFs typically have bigger expense ratios than their passively managed counterparts.
Investors, and I rightfully so I might add, questioned why they should be forced to pay up for the privilege of active management. After all, that was the cost burden many were looking to escape in the first place by ditching mutual funds in favor of ETFs.
Well, times have changed for the better for actively managed ETFs. There are now 36 actively managed ETFs trading on U.S. exchanges and the Pimco Enhanced Short Maturity Strategy ETF (NYSE:MINT) just became the first of the group to collect $1 billion in assets under management. Remember, the first active ETFs are just shy of their third anniversaries, so it will take a while for more funds to cross the $1 billion AUM mark.
Shishir Nigam at etfshub.com gives what I think is the best explanation of active ETFs: The asset class gives investors the best of both worlds, meaning you get the benefits of ETFs and the benefits of active management.
How can active management work in your favor? When it comes to equity-based ETFs the answer is obvious. Let’s assume you investing in an ETF that is heavily weight to one or two stocks and one of those stocks is a real turkey. It’s going to impact the ETF and there’s no way to get rid of the stock unless it’s booted from the underlying index or its percentage of that index is rebalanced.
On the other hand, the manager of an active ETF can identify the dogs in the fund and do away with them in favor of more profitable opportunities.
That’s just one advantage. There are plenty of others, not the least of which is the fact that while active ETFs may feature higher fees than passively managed ETFs, for the most part, you’re still saving money on expenses compared to mutual funds. In my humble opinion, mutual fund issuers realize that active ETFs pose a real threat to them. Hence why so many are trying to get into the active ETF game. I know I’ve used this chart before, but it is applicable again.
Now I am not prepared to convert my entire ETF portfolio to actively managed ETFs and I don’t think you should either. However, I think this is an asset worth further evaluation and worth having a chat about with your financial advisor. If recent activity among active ETFs is any indication, if we revisit this topic in a year, we’ll be talking about much higher popularity and AUM totals.
Todd Shriber is an ETF fanatic, a former hedge fund trader, and a journalist. Todd started his professional career with Bloomberg News, where he covered banks, energy and technology. After leaving Bloomberg, Todd became a trader at a California-based hedge fund where he specialized in trading financials, energy, basic materials, and ETFs.
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