One of the reasons why exchange-traded funds (ETFs) have surged in popularity has to do with their passive nature. Investors have embraced index funds in a big way – even if those indexes track niche or esoteric asset classes. That index-hugging ability comes with lower costs that, in turn, drive better returns and outcomes.
But ETFs aren’t just for passive strategies.
The growth in active ETFs has surged as managers have embraced the fund type in spades. This week saw that number grow even more. This week’s new launches were all about active.
Check out how fast ETFs have grown and their impacts on investing here.
| Ticker | Name | Issuer | Launch Date | ETFdb.com Category | Expense Ratio |
|---|---|---|---|---|---|
| (SQZZ) | Active Alts Contrarian ETF | Active Alts | 03/21/2017 | All Cap Equities | 1.95% |
| (HQBD) | Hartford Quality Bond ETF | Hartford Funds | 03/21/2017 | Total Bond Market | 0.39% |
| (HCOR) | Hartford Corporate Bond ETF | Hartford Funds | 03/21/2017 | Corporate Bonds | 0.44% |
| (CEFS) | Saba Closed-End Funds ETF | Saba Capital | 03/21/2017 | Diversified Portfolio | 2.42% |
Short Squeeze Potential in an ETF Package
There’s a concept in investing called the “short squeeze.” The basic idea is that when a group of investors shorts a stock en masse and the narrative changes for the better, covering the short becomes difficult. All of these investors rush to cover – i.e. buy – shares of the shorted firm. This creates an upward pressure on the stock, and it surges. Finding short squeeze candidates is usually challenging work, and most retail investors are lucky to buy a stock that has that potential.
This is where the Active Alts Contrarian ETF (SQZZ) comes in.
SQZZ is actively managed, and its principals will comb for short squeeze opportunities by looking at fundamental factors such as the earnings quality, debt levels and stability of the business. A dose of technical and relative strength analysis will be used as well. The idea is that finding stocks with high short interest that exhibit excellent fundamentals will lead to a short squeeze and pop shares. That’s easier said than done. As of writing, more than 79% of the fund’s assets were in cash waiting for opportunities.
That fact may give investors pause. Unless SQZZ becomes fully invested, one or two successful “squeezes” may not move the needle regarding performance. Also hurting is the 1.95% in expenses that the ETF charges. That’s expensive for actively managed mutual funds at this point, let alone ETFs.
Hartford Expands Its Lineup
Like many traditional mutual fund managers, Hartford Funds saw the writing on the wall and began to add ETFs to its product mix. The big chunk of those came from its buyout of Lattice Strategies last year. Since then the firm has continued to expand its lineup of smart beta ETFs. This time, Hartford went the active route with two new bond funds – the Hartford Quality Bond ETF (HQBD) and the Hartford Corporate Bond ETF (HCOR). Both funds will sub-advised by the superstars at Wellington Management Company LLP. Wellington has been the driving force behind many of the great gains at Vanguard’s active mutual funds.
Use our Head-to-Head ETF Comparison tool and compare two Hartford ETFs such as (HCOR) and (HQBD). Augment your ETF due diligence by comparing ETFs across various criteria including expenses, liquidity and performance.
HQBD is considered a total return bond fund and will seek to profit from both interest income and capital appreciation. The fund’s managers will apply various fundamental analyses to uncover those bonds that offer good quality. The fund will focus on investment-grade debt, including U.S. government and mortgage-backed securities. But it can own corporates as well.
HCOR will solely focus on the corporate world and will be run in much the same way – bottom-up analysis to find the best combination of bonds offering income and capital appreciation potential.
The ETFs will charge 0.39% and 0.44% in expenses, respectively.
Saba Gets CEF Fever
While new to the ETF scene, Saba Capital has been providing investors with private fund strategies for years. One of their more successful strategies has been in closed-end funds (CEFs). CEFs are a weird blend of ETFs and mutual funds. They feature a fixed number of shares, but trade on exchanges. Supply and demand determine their worth. So they can actually trade for less than they are really worth.
Most retail investors ignore them – which is a shame, but understandable. To that end, the Saba Closed-End Funds ETF (CEFS) hopes to take the guesswork out of the equation. CEFS will invest in a basket of CEFs – both debt and equity – and seek to create a high total return. It can also take short positions and make short sales of CEFs trading for premiums to their NAVs.
Despite its prowess in the sector, Saba will have a high hurdle to jump over. It’s not the first CEF ETF on the market. The index-based PowerShares CEF Income Composite Portfolio (PCEF ) has nearly $700 million in assets. Three other CEF ETFs – from Van Eck and Frist Trust – haven’t attracted any real assets to speak of.
CEFS charges a whopping 2.42% in expenses.
For a list of all new ETF launches, take a look at our ETF Launch Center
The Bottom Line
While ETFs are thought of as passive vehicles, the active space continues to grow as managers look towards the fund type for their new products. This week saw managers embrace active ETFs in spades. While several of the funds offer unique takes, it’ll be interesting to see if investors embrace the new funds.
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