As the ETF industry expanded over the last several years, the market quickly became saturated with funds tracking traditional equity, fixed income, and commodity benchmarks. Once the major indexes had been covered (and in many cases recovered), ETF issuers began getting more creative, launching funds in unique niches of the market, hoping to establish themselves as the leader in the next ETF strategy to take off. And many have been very successful doing so. ProShares dominates the inverse and leveraged ETF market (at least the 2x leveraged market – Direxion has since upped the ante with 3x leveraged funds). PowerShares has set itself apart as a leading sponsor of funds tracking various quantitative indexes.
Although no one can say for sure, the “next big thing” in the ETF industry may very well be actively-managed ETFs. Active ETFs are essentially a hybrid between traditional ETFs and actively-managed mutual funds. As exchange-traded funds, they provide many of the benefits of the ETF structure, including intraday trading opportunities, lower expenses, increased transparency, and potential tax efficiencies. But they also maintain a critical element of active management: allowing managers discretion to move in and out of positions based on their research. Although the active ETF market is only in its infancy, it appears poised for explosive growth over the next year. Here’s a look at five early leaders in this exciting new field:
- Grail Advisors, LLC: Grail can claim to be the trailblazer in this market, having launched the Grail American Beacon Large Cap Value Fund (GVT) in May. Encouraged by the interest it received in its maiden fund, Grail recently announced plans to expand its active ETF family by launching four additional single-manager funds.
- IndexIQ: IndexIQ is also a pioneer of sorts in the active ETF field, having launched the first ever hedge fund ETF, IQ Hedge Multi-Strategy ETF (QAI). IndexIQ recently launched the second in what may be a long line of hedge fund ETFs, the IQ Hedge Macro Tracker ETF (MCRO). Earlier this year, IndexIQ filed to launch as many as 15 more hedge fund ETFs, indicating this issuer is ready to flood the market with its products if sufficient demand exists.
- WisdomTree: WisdomTree, which has several actively-managed currency ETFs, recently announced that it is launching three hedge fund ETFs of its own, each focusing on a specific strategy.
- Claymore: Claymore Advisors, manager of more than 35 passively-managed funds, is the latest to make the jump into the active ETF arena, reccently announcing the launch of three funds. Claymore’s active ETF product line would be unique because it proposes to cover multiple asset classes, including commodities and municipal bonds. Claymore’s Laffer Macro Economic Global Equity ETF, which will invest in company-specific ETFs in an attempt to generate alpha, is also likely to generate a great deal of buzz when launched.
- PowerShares: PowerShares laid the foundation for the current active ETF boom more than a year ago, when it launched four ETFs (PQY, PQZ, PMA, PLK) that attempt to outperform a benchmark through selecting superior stocks. PowerShares’ funds, however, select and trade stocks based on proprietary ranking methodologies, and therefore do not feature the same level of manager discretion as do other funds on this list. Still, PowerShares’ active ETFs (which now include a real estate offering – PSR) have proven to be popular among investors seeking enhanced returns.
Where Are The Big Dogs?
Absent from this list are the major players in the industry. Vanguard, State Street, and iShares hold nearly 85% of the U.S. ETF market, but have been slow to embrace actively-managed ETFs. But don’t think that they’re going to sit idly by if this field proves to be popular with investors. In May, iShares filed for approval of two actively-managed funds, indicating they are ready to spring into action at any time. And with the recent sale of the leading ETF line to BlackRock, a firm known for its active management services, it seems like the stars are aligning for iShares to make a run at active management.