Actively managed exchange traded funds are a small but fast-growing segment of the approximately $2 trillion ETF industry. But regulatory hurdles threaten to stunt their growth.
Like traditional mutual funds, actively managed ETFs harness the buy and sell ideas of professional money managers who aim to outperform a benchmark index. But, unlike mutual funds, the ETFs allow investors to manage short-term risks by trading intraday and using tools such as limit orders, which set maximum or minimum buy and sell prices. The ETFs also tend to have lower expenses than mutual funds.
The funds are a fairly new strategy in ETF investing, with most funds started in the last seven years. The active ETF industry has grown to 128 funds with some $19 billion in assets as of March 31, according to data provided by Morningstar. Nearly half of those funds have been launched since the start of 2014. New funds include the recently launched Innovator IBD 50 Fund (ARCA:FFTY), which invests in the 50 companies that make up the IBD 50 index.
“Because the active ETF space is still so small, I feel like there’s so much more room for growth,” said Noah Hamman, CEO of AdvisorShares, one of the industry’s largest players with 23 funds totaling about $1.3 billion in assets.
AdvisorShares’ active ETFs include high-yield bonds, international equities, global bonds and commodities. Last year, the company launched two currency-hedged gold funds that have allowed investors to buy the yellow metal in depreciating currencies such as the euro and yen.
“Instead of trading a strong dollar for gold, you can trade a weakening foreign currency for that gold exposure,” Hamman said.
Pimco operates the biggest managed ETFs by assets: the Pimco Enhanced Short Maturity Active ETF (ARCA:MINT), with $3.7 billion in assets, and the Pimco Total Return Active ETF (ARCA:BOND), with $2.6 billion in assets. State Street (NYSE:STT), WisdomTree (NASDAQ:WETF), Fidelity and BlackRock (NYSE:BLK) are among other firms that offer actively managed ETFs.
Though active ETFs are growing quickly, about 99% of the $2 trillion in ETF assets remain in passive index products, such as those that track the S&P 500. Both types of ETF are still dwarfed by the $16 trillion U.S. mutual fund industry.
While active ETFs tend to charge lower fees than mutual funds, their growth is hampered by requirements that managers disclose their holdings each day. The fear is that others will be able to buy a stock just before the ETF manager can execute a trade, a practice known as front-running.