Another study of active managers detailing their underperformance against index funds prompts the question: will actively-managed ETFs fare any better?
Big names in the bond industry recently have lent their names to actively-managed ETFs, betting their reputations will translate into investor interest.
Jeffrey Gundlach and State Street Global Advisors recently unveiled the SPDR DoubleLine Total Return Tactical ETF, and according to SEC filings, Bill Gross and Janus are seeking approval to launch an actively managed ETF offering. Gross already has one offering linked to him from his previous tenure at Pimco -- the Pimco Total Return Bond ETF. And Mario Gabelli's GAMCO Investors is now licensing NextShares ETFs.
But the general track record of active managers in the equities market against passive, index funds suggests investors should think twice about investing with a money manager, says Aye Soe, Senior Director of Index Research & Design at S&P Dow Jones Indices.
Her research group found that 86% of active managers trailed the S&P 500 last year, while 82% underperform over 5- and 10-year periods.
"You still have managers that can outperform the benchmark," Soe says. "The problem is you can't identify them in advance. There's no persistence for top managers either. [Their performance] doesn’t last until next period."
Soe's skepticism of manager performance carries over to actively-managed ETFs, largely because of their non-transparent construction that forgoes daily disclosure of portfolio holdings for a quarterly report instead.
"How do you know it's doing what it's supposed to do?" Soe asks. "You need to have a benchmark, but that aspect of performance measurement is completely missing. The same thing applies to unconstrained bond funds.
"I would suggest investors ask, 'How am I going to measure performance?'"
Uncertainty and unproven track records are some reasons why investors may have held back on actively-managed ETFs. There are 120 of them in the market with a total of $19 billion in assets, according to Bloomberg, representing less than 1% of ETF assets.
"If you have a portfolio manager for an active open-ended mutual fund who is really good, do you really need to access him via an ETF?" asks John Hyland, chief investment officer of United States Commodity Funds. "If he's really generating alpha, is there a compelling reason for an investor to want to buy that through an ETF format? I don't know if the answer is yes."
Skepticism is also warranted when considering the source of some actively-managed ETFs, says Hyland, once an active manager of portfolios and now an ETF provider.
He argues that for many traditional money management firms slow to respond to the ETF trend in investing, actively-managed ETFs is their opportunity to get into the market.
"They ignored them, and in the last 10 years they looked on in horror as trillions went into ETFs yet their business model moved sideways," Hyland says.
"If they step into the market with passive offerings it just means they've come out with selection of me-too products that are not going to get anywhere, as nobody needs another S&P 500 index fund," he adds. "Their only hope is that they can do these actively managed equity ETFs. They have to believe in this otherwise they have no strategy."
Tom Roseen, head of research services at Lipper, agrees that the passive ETF space is crowded already with offerings. But he argues that is why there's opportunity for actively-managed ETFs, "if they keep fees low, and have a winning strategy, like Bill Gross did."
Investors will appreciate having proven names involved in ETF portfolios, he says. "These are guys picking stocks and bond funds over long periods of time."
In an upside market, it is a mistake to dismiss active management entirely, he adds. "When we have sector rotation, actively managed funds can decide to go short on a sector, whereas index funds have to stay at their percentages. So there are periods where actively managed funds will do better."
Roseen adds there is room for actively managed ETFs to find some demand in the market with the implementation of alternative strategies not easily replicated by a passive strategy, such as factor investing.
When equities markets are doing well, says James Lauder, CEO of Global Index Advisors, the correlations between equities gets higher and it is hard for active managers to add value.
"But in a multi-asset class portfolio, 90% of the behavior is based on asset allocation, on how you mix larger buckets," Lauder says. "I realize it's incredibly difficult over consistently long periods of time. You have to ask yourself, what do I want to accomplish? Because a little bit of behavior can change outcomes."
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