The big guns are now squaring off in one of the tiniest slices of the fund business.
This would be the slice known as actively managed exchange-traded funds.
This is the direct opposite of the principle that has driven ETFs into a
And barely a hair of the more than
Yet, in March,
Then, at the end of April,
This, of course, is the outfit that started the entire exchange-traded alternative to mutual funds almost two decades ago. In
Now known as SPY, this has become the most widely traded security of any type. According to NYSE Arca, the exchange with the greatest market share in the trading of ETFs,
The seventh most widely traded security is also a State Street ETF, one that pioneered the concept of buying into a commodity such as a precious metal through shares. Its
Already active in the actively managed ETF business are
Looking to get into the game, according to
For him, the benchmark is Vanguard, which has built its business on the premise that investors should simply put their money in an index fund and forget about it. Trying to beat the market, by its normal playbook, is folly.
So, to Steinberg, “alpha” – or an above-market return – is generated when an actively managed fund achieves a better return after adjusting results for taxes and risk than an equivalent Vanguard fund.
That, of course, is not the only standard. When State Street announced its first three actively managed funds, it enunciated a fairly straightforward measure of what that meant.
Its funds were to achieve a return that each year would be 1 to 2 percent above market returns or a custom-designed benchmark.
“The goal is obviously to outperform” market returns and market benchmarks, in general, said
But he wouldn’t quantify what that distance should be, to make sure an actively managed ETF succeeds.
“It comes back to the investor experience. How are we managing risks within a portfolio?’’ said
For now, a big issue facing actively managed ETFs is “tradeability.’’
That is to say, you can’t get a lot of trading in an actively managed ETF, unless there is a lot of trading in that ETF. Trading begets trading.
And, right now, actively managed ETFs are thinly traded.
But those jumping into the field are convinced that will change. AdvisorShares’ Hamman expects that actively managed funds will be at least 1 percent of the ETF business within two years and probably more.
State Street’s Ross doesn’t see why ETFs won’t approach the mutual fund model more closely. There, actively managed funds outnumber passive funds, in terms of assets under management, by a factor of seven to one.
So the bet on actively managed exchange-traded funds is, in effect, two-fold.
First, exchange-traded funds already rival mutual funds in attracting new funds.
In the past 14 months, for instance, exchange-traded funds have attracted
By comparison, mutual funds of all types – domestic stock funds, foreign stock funds, bond funds, hybrid bunds – have attracted
Second, actively managed funds must prove they can … produce the above-market returns they promise. Hamman thinks that will take three years or more for each fund, to build a track record.
Right now, it’s buying into equities, before investors, broadly speaking do, Coolgasian said.
Total return, after all, is what counts, he says. Yes, dividends have accounted for 40 percent of returns on stocks, for nearly a century. But it’s the combination of yield and return that matters.
“The best time to buy insurance is before you need it,’’ he says, “and before it gets expensive.”
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