Handicapping The Active ETF Race

by on March 18, 2010 | ETFs Mentioned:

To say opinions on the future of active ETFs are mixed would be a major understatement. Nearly two years after PowerShares launched its first line of active ETFs and a year after the much-publicized launch of the Grail American Beacon Large Cap Value ETF (GVT), active ETFs remain stuck in first gear. Investors have expressed excitement over the development of an investment option combining active management with the benefits of the exchange-traded structure, but have so far been hesitant to put their money where their mouth is.

Some analysts doubt that active management will ever really catch on, citing a number of hurdles that may be difficult to overcome. Others think that a surge in activity in the space is inevitable, eagerly anticipating a number of potential “gamechangers” that could accelerate growth. Despite the slow start, active ETFs have gained some momentum in recent months, and there’s reason to believe it’s only a matter of time before these vehicles take off. PIMCO’s foray into the active bond ETF space has been quite successful, as the three active ETFs overseen by the bond fund giant have nearly $200 million in assets.

Below, we profile the active ETF landscape, from the early leaders to the “second wave” to the dark horses who could make a splash in coming months.

Ticker Issuer Assets Inception
MINT PIMCO $171 11/09
SMMU PIMCO $8 2/10
MUNI PIMCO $23 11/09
GVT Grail $3 5/09
RPX Grail $4 10/09
RWG Grail $4 10/09
RFF Grail $3 10/09
RPQ Grail $3 10/09
GMTB Grail $5 1/10
GMMB Grail $5 1/10
PQZ PowerShares $5 4/08
PQY PowerShares $21 4/08
PLK PowerShares $8 4/08
PMA PowerShares $4 4/08
PSR PowerShares $12 11/08
DENT AdvisorShares $28 9/09
ALT iShares $30 10/09

The Early Leaders

PIMCO: The Newport Beach, California-based bond fund giant was a late entrant to the ETF game, but has quickly become one of the biggest players in the active arena. PIMCO currently offers three active bond ETFs, including the ultra-popular Enhanced Short Maturity Strategy Fund (MINT).

PIMCO has a sterling reputation in the field of bond fund management, and the firm’s early success in the ETF space is an indication that investors value a firm’s track record when considering an allocation to active ETFs.

Grail Advisors: Grail made headlines last year with the launch of the American Beacon Large Cap Value ETF (GVT), the first actively-managed ETF to allow manager discretion in the portfolio construction process. Since then, Grail has expanded its product line to seven funds, including five equity ETFs and two bond funds.

Grail is also pioneering a new area of the active ETF arena, working to convince existing mutual funds to covert to the ETF structure. The company is reportedly close to doing so, a move that could potentially have a huge impact on the active ETF industry.

AdvisorShares: This ETF issuer’s product line currently consists of one fund, the Dent Tactical ETF (DENT). DENT seeks long-term capital growth by utilizing proprietary economic and demographic analysis to determine the overall trend of U.S. and global economies. DENT has seen a surge in interest in recent weeks, taking in about $5 million in cash in February (total assets now stand at about $28 million).

AdvisorShares has filed with the SEC for several additional actively-managed ETFs, including the Mars Hill Global Relative Value ETF (GRV) and Peritus High Yield Debt ETF (HYLD).

PowerShares: The Wheaton, Illinois-based issuer is best known for its “intelligent” index ETFs that blur the line between active and passive management, but was an early entrant into the full-blown active space as well. PowerShares launched four funds that seek to outperform broad market benchmarks in April 2008, and followed with an active real estate ETF in November of that year.

Unlike GVT and other Grail funds, these ETFs don’t allow manager discretion, relying purely on quantitative analysis to dictate buy and sell decisions. PowerShares’ active ETFs have been slow to gain traction, although PQY recently saw a surge in activity.

WisdomTree: Most investors may be surprised to see WisdomTree on a list of active ETF providers, but the issuer best known for its fundamentally-weighted ETFs actually maintains the largest line of active ETF products. WisdomTree’s currency products, which include both single currency funds and diversified currency baskets, are all actively managed. These eight ETFs have aggregate assets in excess of $1 billion, led by the WisdomTree Dreyfus Chinese Yuan Fund (CYB), which has $600 million in assets alone.

iShares: The market leader is best known for passively-indexed ETF products, but iShares has quietly waded into the active ETF waters as well. The iShares Diversified Alternatives Trust (ALT) seeks to maximize absolute returns from investments with historically low correlation to traditional asset classes. ALT uses three primary strategies, including yield and futures curve arbitrage, technical momentum/reversal, and fundamental relative value. ALT has seen cash inflows of $20 million through the first two months of 2010, and assets have now grown to more than $30 million.

iShares has also filed for additional actively-managed ETF products, including both stock and bond funds, and an increased focus on this space by the market leader could have a huge impact on the industry’s development.

The Second Pack

Several existing ETF issuers have explored the idea of an actively-managed ETF, including a few traditionally regarded as leaders in the beta ETF space. Issuers who have filed for actively-managed ETFs include:

Vanguard: When the firm founded by legendary buy-and-hold proponent Jack Bogle filed for approval on an actively-managed TIPS ETF, many investors assumed that such a fund would never make it to market. But Vanguard seems intent on launching an active inflation-protected bond ETF this year (the proposed fund would be a separate share class of an already popular mutual fund). See an interview with Rick Genoni discussing Vanguard’s plans for active bond ETFs here.

First Trust: Similar to its Chicagoland neighbor, First Trust is perhaps best known for its enhanced index funds that fall somewhere between passively-indexed cap-weighted ETFs and actively-managed products. Now First Trust has a pair of active products in the works that would not be linked to any benchmark, including both developed markets and emerging markets equity products.

Claymore: Shortly after Grail launched its first active fund, Claymore filed for approval on several actively-managed ETFs, including global infrastructure, hard assets, and agribusiness funds. The company separately filed for an active muni bond ETF and the Claymore Laffer Macro Economic Global Equity ETF to be managed by the firm of economist Art Laffer (best known for the curve that bears his name).

Outside Looking In

While a number of existing ETF issuers have either launched active ETFs or filed for approval on active funds, the real wild cards are the numerous fund giants who are currently on the outside looking in. PIMCO’s relatively successful jump from mutual funds to ETFs has no doubt been carefully analyzed by all of the financial behemoths reportedly interested in developing actively-managed ETFs:

Legg Mason: The Baltimore-based firm had been rumored to be interested in active ETFs for some time, and recently filed for exemptive relief to launch a line of products.

T. Rowe Price: Another Baltimore fund giant has thrown its hat into the active ETF arena, recently asking for regulatory approval to launch a line of active products.

JP Morgan: This Wall Street giant has already experienced some success in the ETF industry, as the JPMorgan Alerian MLP Index ETN (AMJ) is one of the most popular exchange-traded notes available to U.S. investors. JP Morgan has now filed for SEC approval to launch both indexed and actively-managed ETF products, including an active fund that would invest in about 300 large cap stocks.

Eaton Vance: The Boston-based firm known for its expertise in closed-end funds recently filled with the SEC for approval on five actively-managed fixed income ETFs. The proposed funds are the Eaton Vance Enhanced Short Maturity ETF, the Eaton Vance Government Limited Maturity ETF, the Eaton Vance Intermediate Municipal Bond ETF, the Eaton Vance Prime Limited Maturity ETF and the Eaton Vance Short Term Municipal Bond ETF.

RiverPark: This firm is in an interesting position in the active ETF race. RiverPark already serves as a subadviser to four active funds from Grail, and is now looking to launch its own line of active funds. In a recent SEC filing, RiverPark outlined two funds, including the RP Short Term High Yield Bond ETF and RP Energy ETF.

These big names are just a few of the fund companies and financial firms interested in active ETFs, and the list could grow significantly in coming months.

For more ETF news, make sure to sign up for our free ETF newsletter.

Disclosure: No positions at time of writing.