Some Active ETFs Earning Their Keep During Crisis

by on August 23, 2011 | ETFs Mentioned:

The ETF industry’s strong growth in recent years has led to innovation across the board. Now, investors can find products that offer exposure to nearly every corner of global markets through a single ticker. And while many of these new options have been welcomed with open arms, investors have been wary of others. One space in particular that has been slow to gain traction has been the actively-managed ETF sector.

The exchange-traded industry was created, in part, as an alternative to traditional actively-managed mutual funds, appealing to investors who had been frustrated by the inability of these products to consistently generate alpha and consistent ability to charge hefty management fees. As can be expected, when exchange-traded products debuted with an actively managed structure, many investors were not very welcoming, as they originally sought out ETFs to escape the inefficiencies of mutual funds. Active ETFs, however, are different; they feature all of the benefits of an ETF, like intraday liquidity, transparency, tax benefits, etc, while offering the potential benefits of an active management team. Generally speaking, the expense fees on these active ETFs are well below those of the average mutual fund, helping to draw in some investors [see also ETF Insider: Beware Of A Dead Cat Bounce].

Noting certain flaws and potential inefficiencies in various methodologies, many investors prefer to utilize active managers who know the terrain and are experienced in a certain asset class–especially during tumultuous times. And as recent weeks have demonstrated, this faith in active management over indexing strategies may be justified. As equity markets have tumbled and volatility has shot through the roof, just about every asset class has been hammered over the last month or so. But a look at the performance of some active ETFs during the worst of the crisis highlights the potential appeal of these products in certain environments:

Active Bear ETF (HDGE)

HDGE was introduced in early 2011 with a unique strategy, as it is the only actively-managed 100% short fund. The fund utilizes forensic accounting to identify which companies are using aggressive strategies to possibly cover up struggling business or other issues. The managers look to financial statements and quarterly earnings to determine which companies they feel are attempting to mask a deteriorating business. Once they identify these securities, HDGE establishes a short position for its investors. Right now, HDGE’s top holdings include short exposure to companies like General Electric, as well as a big short position in SPY.

The ability to quickly shift positions paid off well during our recent crisis (the close of 08/03/2011 to close of 08/10/2011), as SPY dipped approximately 11%, while HDGE shot up an impressive 13.3%. In other words, the gain turned in by the bear fund outpaced the broader S&P 500, demonstrating that the managers had managed to establish short positions in several of the stocks that took the biggest drop during that period. The direction of HDGE during that period reflected the fund’s objective, while the magnitude of the appreciation relative to the broader market can be seen as an indication of the manager’s skill in identifying short sale candidates [see also Inside The Active Bear ETF: Q&A With John Del Vecchio].

Peritus High Yield ETF (HYLD)

This ETF is another brainchild of AdvisorShares, as the issuer teamed up with Peritus to offer the only actively-managed junk bond product currently on the market. According to the fund’s website, “Peritus takes a value-based, active credit approach to the markets, largely foregoing new issue participation, favoring instead the secondary market where Peritus believes there is less competition and more opportunities for capital gains.”

As a player in the high yield, or junk bond space, HYLD’s performance can be compared to the ultra-popular–and passively-indexed JNK–which lost 6.1% during the most recent crisis. During this same period, HYLD was down just 2.6% in comparison, another win for active management. During the sell-off, HYLD moved roughly 8% of their assets to cash, as the management team chose to wait out the storm rather than be battered alongside its competitors, allowing HYLD to shine in the high yield space [see also Four ETFs That Have Held Their Ground During Crisis].

Enhanced Short Maturity Strategy Fund (MINT)

MINT is backed by the fixed income giant PIMCO, giving it an active team that have a strong track record over the years. Another notable feature about this fund is its expenses. At just 35 basis points, MINT comes in as one of the cheapest active products out there. The fund primarily invests in short-term investment grade debt with the average portfolio duration rarely exceeding one year. The fund also aims to keep its strategy simple by eliminating the use of options, futures, or swaps. MINT has over $1.3 billion in assets and a healthy daily volume over 179,000.

Like HYLD, this product was in high focus during the week-long crisis, as the S&P downgrade had investors worried about the future of U.S. debts. During this period of time, MINT dipped approximately 0.25% while the comparable, passively-indexed SHY gained about 0.28%. Though a small discrepancy, the active structure did not hold up for MINT in our recent economic scare. All in all, this product has remained relatively flat over the past year, as it has gained 0.39% in 2011 [see also Talking Actively-Managed ETFs With Tom Graves Of S&P].

Managed Futures Strategy Fund (WDTI)

WDTI is another relatively young fund, debuting at the beginning of 2011. This fund features the first actively managed futures strategy which employs a quantitative, rules-based strategy designed to provide returns that correspond to the performance of the Diversified Trends Indicator (DTI). The DTI is a long/short managed futures strategy that incorporates a diversified group of 24 liquid components of exchange-traded commodity and financial futures contracts. Currently, the fund is composed of approximately 38% commodities and 62% financials futures.

WDTI is a total return product that applies a long/short strategy. Because of this, the fund aims for market neutrality, and the best baseline comparison for this product is a 0% return. WDTI was one of the few ETFs that joined HDGE in the winner’s circle after that volatile week in early August, as this product managed to squeeze out a gain while just about every other asset class was deep in the red. During the worst of the sell-off (the week ended August 10) this fund gained 1.4%, an impressive result considering financials, along with a number of commodities, were slaughtered during the downgrade crisis.

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Disclosure: No positions at time of writing.