New Actively Managed ETFs Are Flawed

Many of these newcomers lack the transparency, passivity and low costs that have made traditional ETFs so successful.
Publish date:

Investors have shown time and again that when it comes to exchange-traded funds, transparency and low costs trump management. For now, investors seeking active management are sticking with the mutual fund industry, but that's not stopping Wall Street firms from launching actively managed ETFs. However, as these newcomers enter the ETF game, many largely disregard the qualities that have made ETFs so successful.

With over 900 products on the market and more than $1 trillion in assets, it is no wonder that an increasing number of dominant Wall Street players have announced plans to enter the expanding ETF arena. Some companies, such as

Goldman Sachs

(GS) - Get Report


Eaton Vance

(EV) - Get Report

and T. Rowe Price, are still awaiting approval to launch their first products, while others, such as PIMCO and


(SCHW) - Get Report

, have already released a number of products in the past year.

On Thursday,


(JPM) - Get Report

joined the bandwagon when it announced its own plan to launch a collection of exchange-traded funds. The firm already offers the popular

JPMorgan MLP Alerian Index ETN

(AMJ) - Get Report

, a fund I have long promoted as a stable play on the natural gas industry.

As evidenced by February's NSX data, the exchange-traded fund industry is still dominated by the likes of


(BLK) - Get Report


State Street

(STT) - Get Report

and Vanguard, whose products largely reflect the original three tenants of these instruments: transparency, passivity and low costs.

Despite seeing the past success of these traits, a common trend highlighted by this wave of ETF newcomers is the desire to launch actively managed products.

Though long touted as the future of the exchange-traded fund industry, for the most part, actively managed ETFs have failed to develop much of a following. For instance, Grail Advisers, viewed as a pioneer in the industry, has seven different active ETFs currently available, but has only managed to accumulate a combined total of $25 million in assets.

Grail's meager following leads one to wonder why so many of these newcomers are still confident that active instruments are a sure-fire way to gain a presence in the ETF industry.

Of course, not all active fund launches have been as unsuccessful. Pimco's

PIMCO Enhanced Short Maturity

(MINT) - Get Report

stands out as an actively managed product that has actually managed to gather some steam. Since its launch in late 2009, the fund now boasts $136 million in assets.

As I highlighted in my


blog earlier this week, what sets MINT apart from its struggling competitors could be the fund's inherent "angle." When investors think of Pimco, the first things that come to mind are bonds and Bill Gross. The fact that the Pimco name is synonymous with this specific market slice and active management provides the company with an ideal opportunity to parlay that notoriety into the actively managed ETF realm.

The true test of this theory, however, will be if the firm's other two actively managed instruments, the

PIMCO Short Term Muni Strategy

(SMMU) - Get Report


PIMCO Intermediate Muni

(MUNI) - Get Report

can garner the same following. Currently, like other actively managed instruments, the two funds have struggled to attract assets.

As evidenced by Pimco's MINT, active ETFs, when properly marketed, can prove to be successful and attractive investing vehicles. However, for now, it would be in the best interest for newcomers who do not have the same well-defined "angle" as Pimco to stick to continuing the passive ETF tradition.

Of course, it's possible that companies may not be jumping into actively managed instruments to get a jump on the next wave in ETF products. Instead, the focus on actively managed ETFs may be due to the fact that the passive ETF market is becoming saturated.

This week we saw a number of new instruments that simply mimic other funds already available. The



will compete directly with the

Market Vectors Russia ETF

(RSX) - Get Report

, while the

Claymore Wilshire 5000 Index ETF


will follow an index similar to that of the

SPDR Dow Jones Total Market ETF


. Active management may just be the one slice of the ETF realm that still has lots of space for new products.

At the time of publication, Dion had no positions in stocks mentioned.

Don Dion is president and founder of

Dion Money Management

, a fee-based investment advisory firm to affluent individuals, families and nonprofit organizations, where he is responsible for setting investment policy, creating custom portfolios and overseeing the performance of client accounts. Founded in 1996 and based in Williamstown, Mass., Dion Money Management manages assets for clients in 49 states and 11 countries. Dion is a licensed attorney in Massachusetts and Maine and has more than 25 years' experience working in the financial markets, having founded and run two publicly traded companies before establishing Dion Money Management.

Dion also is publisher of the Fidelity Independent Adviser family of newsletters, which provides to a broad range of investors his commentary on the financial markets, with a specific emphasis on mutual funds and exchange-traded funds. With more than 100,000 subscribers in the U.S. and 29 other countries, Fidelity Independent Adviser publishes six monthly newsletters and three weekly newsletters. Its flagship publication, Fidelity Independent Adviser, has been published monthly for 11 years and reaches 40,000 subscribers.