Active Exchange-Traded Funds: Are We There Yet?

Abstract

Investors anxiously anticipated the debut of actively managed ETFs in 2008, expecting them to succeed as well as their counterparts in the mutual fund industry. In the end, the reality didn’t match the expectations, as actively managed funds are still languishing in the basement of the ETF industry. The first goal of this study is to identify the factors responsible for this state of affairs, particularly an issue around transparency that remains the focus of contention between the Securities and Exchange Commission and fund sponsors pursuing approval of new active ETFs.

This study will also investigate whether this sector, which seven years into its existence still presents the characteristics of a cottage industry, is capable of turning the tide and turning into a compelling investment premise. For this purpose, a series of statistical metrics commonly used in the market were applied to all of the current active ETFs, which are split in this chapter into broad asset categories for the sake of convenience. The results show fixed-income ETFs as the only type capable of bringing some value to an overall investment portfolio by enhancing its returns while at the same time reducing its variability. No wonder that they represent by far the largest share of the U.S. active ETF market, although it remains trivial as a whole in terms of net assets.

TOPICS: Exchange-traded funds and applications, exchanges/markets/clearinghouses