The growth of the active ETF market was a big theme at the recent Inside ETFs conference held in Hollywood, Florida, and while there were plenty of issuers in attendance to discuss the benefits, it remains to be seen. whether advisors will be as responsive.
Even though actively managed exchange-traded funds have been around for more than a decade, they’re only just beginning to attract the attention of a wider group of asset managers and ETF issuers. in the past two years hope the packaging will give more advisors access to their investment strategies.
Asset growth, however, follows fund growth. Currently, active ETFs represent 30% of the 3,021 US ETFs funds, but hold only 5% of the total investments, acaccording to Morningstar.
The pivot to active ETFs is partly due to the saturation of passive index funds, as well as active strategists looking to stem outflows from their higher-priced active mutual funds. Yet many use the active structure of ETFs to create more thematic investment portfolios that do not correspond to traditional box-style portfolios; this may give advisers unique access to certain corners of the market, but raises the question of how these funds are supposed to be judged.
In 2020, 175 active ETFs were launched with a total of $181.3 billion in assets under management per the end ofat year. Last year, 298 active ETFs were launched, an increase of 70%, bringing total active assets by 61% to $292.7 billion. This year saw the launch of 99 active ETFscompared to only 67 passive ETFs. Total active ETF assets as of May 31 were $311.5 billionaccording to Morningstar.
Several speakers pointed to the clear advantages of the ETF envelope over mutual funds, including lower costs, greater tax efficiency, greater flexibility and cheaper transactions.
Steve Cook, managing director of ETFs at Harbor Capital Advisors, reminded advisers that mutual funds are clocked with capital gains when investors sell stocks, leaving those who stay behind with capital gains taxes.
“Because ETFs avoid capital gains distributions, the ETF investor won’t be stuck with a 15% capital gains bill when other investors sell,” Cook said.
It’s especially painful when the markets go down. “In mutual funds, you are impacted by the activity of other investors. In a down year, you could still have capital gains,” said Rafia Hasan, Chief Investment Officer at Wipfli Financial Advisors. markets are down, investors are reaping tax losses, which exacerbates the situation of tax inefficiency in a mutual fund.”
Some advisers view the low trading volume of active ETFs as a liquidity issue, said Matt Lewis, head of ETFs at American Century. But it’s misplaced.
“It just means it hasn’t traded as much as a passive ETF,” Lewis said. “What really matters is the liquidity of the ETF’s underlying stocks.”
Yet, although the structure of ETFs has advantages over mutual funds, managers still face the problem of convincing advisors that active strategies can generate higher returns than passive portfolios at a lower cost. According to the S&P Index vs. Active (SPIVA), the oft-cited S&P Dow Jones Indices report, only 11% of all domestic active equity funds beat their benchmark over a 10-year period in terms of absolute returns. Of the 15 mutual funds on Harbor Capital’s website, 40% claim to beat their benchmark over 10 years.
Most active managers who issue ETFs do not replicate traditional investment strategies, yet these benchmarks are often how their performance is judged by research firms and institutional investment committees.
“Customers don’t care about landmarks. The reason many managers don’t beat their benchmarks is because they don’t try to,” said Robert Isbitts, co-founder and chief investment strategist at Sungarden Investment Publishing.
Harbor Capital has issued three active ETFs over the past year, including the Harbor Corporate Culture Leaders ETF (HAPY) intended to invest in companies with “strong corporate cultures”.
“All of our products will deliver idiosyncratic returns,” Cook said. “We have concentrated portfolios with between 35 and 70 stocks. We are not benchmark cutters. We are not afraid of transparency. So we will deliver these portfolios in a transparent active ETF package. You know what you own and I think the benefit is, longer yield, being able to provide true idiosyncratic alpha versus a typical benchmark.
Lewis acknowledged the problem: “Active ETFs have a benchmark, but that’s really what the strategy is trying to do in the portfolio and is it right for you. The fund may not beat the benchmark, but does it meet the portfolio allocation objectives and match the strategy you have researched and want to participate in. We try to beat the benchmarks, but ultimately it comes down to whether the strategy matches your investment goals. »
“I would say the investor’s toolbox is getting bigger and bigger,” said Dodd Kittsley, country director at Davis Advisors, one of the first active managers to put their strategies into transparent ETFs. “For active equity ETFs, I think we’re just in the first round of a potentially additional ballgame. This is ETF 4.0, and it will drive the growth of the ETF industry in the future for many reasons. Everyone equates equity ETFs with indexing. But it’s not that. ETFs are really about getting more effective exposure. It can be indexes, rule-based indexes, or judgement, discretion and experience that add tremendous value. »