This is the week that actively managed exchange-traded funds get their biggest booster shot since they first arrived, less than five years ago.
"That will draw attention," said
By contrast, roughly
Which makes the actively managed ETF almost a rounding error, in the overall scheme of these funds. ETFs now account for roughly 35% of daily volume on the
But the takeoff is dramatic, by Hamman's count.
Compare their start, he says, to the start of index-based exchange-traded funds. These are funds which are passively managed. Their assets are placed in a carefully constructed marketbasket of shares in stocks or bonds that fit a benchmark index that is created by an index creator such as
No "active" management required, where a human being tries to select stocks that outperform the market or its embodiment in a benchmark.
After the first three years, two index-based ETFs existed in 1995, according to Hamman. They counted
After the first three years, 30 actively managed ETFs existed, he noted. By the end of that third year, which was 2010, they counted
In the AdvisorShares construct, there are two ways to apply active management to exchange-traded funds.
One is to use rules to identify stocks or bonds that outperform their markets. The other is to use…human beings.
Take the rules-based approach, first.
The AdvisorShares TrimTabs Float Shrink ETF (TTFS) aims to beat the total return of the Russell 3000 Index, with less volatility.
Stock selection for TTFS is based on research by TrimTabs, an institutional research firm that looks at stock prices as a function of supply and demand rather than value.
That exchange-traded fund identifies companies which are buying back their shares (i.e., shrinking the float) and, at the same time, creating significant cash flow.
This becomes a way of identifying, in effect, a distribution to shareholders, Hamman said. And can be quantified by applying rules.
Then there is the
Again, quantifiable. But not based on an index, per se. Instead, designed to produce above-average returns.
Also pursuing the quantified approach is
These take existing indices and tweak them to try to create greater performance.
Every stock is scored on the basis of five growth metrics and three value metrics. If a fund is looking for growth stocks, the growth scores are used; if value is the overriding measure, the value scores are used.
The growth stocks are measured on:
Three-, six- and 12-month price appreciation (i.e., momentum); One-year sales growth; and sales-to-price ratio.
The value stocks are scored on:
* Book value to price
* Cash flow to price
* Return on assets.
The funds charge 70 basis points in expenses, among the highest fee for any non-leveraged equity ETF.
The idea is to quantify what makes for a better fund and run that by repeatable rules.
In growth or value stocks, for instance, one principle is to avoid putting too much stock in stocks with large capitalizations, said
Using the Standard & Poor's 500, the bottom 125 stocks-those with the lowest scores for "investment merit"-are tossed out. Then, a weighting system sets in.
The 75 stocks that score the best in the model become 33.3% of the overall holdings in the fund.
Then, the next highest-scoring 75 for the next 26.7% and each 75 thereafter count for a progressively smaller slice.
The approach has worked well enough that assets in AlphaDex funds have increased from
Then, there is the human approach.
The WCM/BNY Mellon Focused Growth ADR ETF (AADR) from AdvisorShares invests in high-quality, large-cap growth stocks outside
These are firms with at least
Out of 35,000 stocks outside
But it's not clear that all this active management makes a difference.
Indexed investment fees range from one tenth of one percent 10 bps to one half of one percent 50 bps of a fund's assets. In comparison, hedge funds, for instance, can charge as much as 300 bps the assets under management plus an additional 2000 bps of any gain.
"In our study, some managers did indeed exhibit high, consistent skill and value," Sury said. "The trick is to weed out those who do not."
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