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Actively managed ETFs begin piling into the passive ETF space


It is not just the big boys that launch and run ETFs, but it still takes some pedigree to get a fledgeling ETF shop off the ground.

Raj Lala, former head of Wisdom Tree in Canada, is leading newcomer ETF firm Evolve into its first listings, with four actively managed ETFs on the launch pad in Toronto this month.

What’s that? Active you say? Well, yes, the funds will be listed on the Toronto Stock Exchange (TSX) – they are Evolve Active US Core Equity, Evolve Active Short Duration Bond, Evolve Active Canadian Preferred Share, and Evolve Active Floating Rate Loan. The management fees on the funds range from 0.65% to 0.75%, which is a lot lower than most mutual funds on the market.

The funds are not passive trackers, however, and will be sub-advised by third party investment managers, like Nuveen Asset Management and Gordon & Payne. However, Evolve will also be looking at pure passive funds as potential future products. In particularly, according to Lala, there are some areas of the ETF market that are under-served.

Want to find out more about ETFs? Check out our Exchange Traded Funds tutorial.

What are actively managed ETFs?

Readers in Europe may be forgiven for thinking that all ETFs are purely passive index trackers. After all, ETFs, exchange-traded funds, have become popular because of their low fees and their ability to simply follow market indexes as closely as possible. Why then the need for third party management advisors, as in this case?

Active ETFs are growing in popularity with investors because of the convenience factor rather than the price factor. While management fees will be higher than passive index trackers – how can they not be – these funds are still structured as an exchange-traded vehicle, which can be bought or sold like a share. In some ways there are similarities with the investment trust structure in the UK. Investors may even want to trade actively managed ETFs on an intra day basis. By contrast, conventional mutual funds or unit trusts come with high front end fees which are partly there to encourage investors to stick with the fund for a few years. What asset managers don’t like is investors skipping around between products as markets change, and try to structure the fees for their products accordingly.

Even big ETF providers like Vanguard, which spearheaded the passive investing revolution, are now launching actively managed ETFs. The market for active ETFs is still only tiny, mind you. Total assets under management in the US market alone came to just south of $15 billion three years ago, but this is what the now massive passive industry looked like in 1999.

And ‘smart beta’ is getting in on the act too

Fund managers themselves also worry about giving away too much information – actively managed ETFs, because of the transparency requirements of stock exchanges, mean giving away quite a lot of information about a fund manager’s buying and selling habits. Portfolio managers obsess about their competitors spying on them, or being front run by brokers or other more nimble managers. Yet fund managers also have one eye on the massive volumes of assets being directed into ETFs at the moment.

On top of this we are seeing the growth of so-called ‘smart beta’ ETFs – funds which do not blindly track the index, but where the manager has a degree of active decision making intended to optimise the performance of the fund. These are proving very popular with financial advisors in the US and The Armchair Trader has several conversations with ETF managers who are planning smart beta launches in the European market, although we are sadly bound to secrecy on these at this point in time.

However, the big money managers of smart beta include the like Wisdom Tree, First Trust Dorsey Wright, iShares, Vanguard and SPDR with its DoubleLine Total Return Tactical.

Where does this leave you, the investor? A bigger market is a good thing – you have more choice, plus lower fees are forcing fund managers to price their products more competitively. Active and smart beta funds will be bringing you more investment talent at a lower price point. Think of it like being able to buy Premiership football talent for your team at a lower price, and being able to sell players on without the complexities of a big contract. For the smaller investor, actively managed exchange traded funds seem like a good thing.

Professional money managers will still argue that you need to invest for the long term, but they frequently say this because they know you need to stay invested in funds for a long period to make up the big fees you traditionally paid to get into them in the first place. Some of the best investment profits I’ve made have been in the 6-12 month time horizon, at a time when the FTSE 100 was flat over a 10 year period. That shoots that argument down, and also makes the case for using ETFs to capitalise on medium term market trends without seeing your gains eaten by fees.

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This article does not constitute investment advice. Make sure you do your own research or consult a professional advisor.

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