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3 Active ETFs for a Choppy Market - ETF News And Commentary

The broad U.S. stock market is lately having trouble finding its footing due to a mountain of woes and increased volatility. The S&P 500 and the Dow Jones have fallen drastically from their peak reached last month and eroded most of their outsized gains made this year, pushing the indices slightly in the green from the year-to-date look.

While an accelerating job market, a rebounding housing market, merger mania, earnings growth and rising consumer confidence are driving the stocks higher, lower GDP growth, Grexit worries, Chinese slowdown, uncertain timing of interest rate hike, strong dollar and stretched valuations continues to disrupt the rally (read: Grexit Fears and Fed Meeting Put These ETFs in Focus).

In such a gloomy and sideways market, actively managed ETFs seem far superior to the passively managed or index funds.

Active ETFs: Pros and Cons

These funds are actively managed by using various skills and attributes (like top-down approach, bottom-up approach, value investing, growth investing or absolute returns strategy) and could shift their allocations and positions according to the market environment. As a result, these funds generally outperform the benchmark index, especially in illiquid or inefficient markets or even if the odds are against it.

Though these funds attempt to beat the market, they might underperform their passive counterparts as most fund managers fail to match the return of the indexes with that of the funds’. Additionally, active funds are arguably expensive as these involve research expenses associated with the manager’s due diligence and additional cost in the form of wide bid/ask spread beyond the expense ratio. These funds also require daily portfolio disclosures, which could hamper the competitive portfolio composition.

Despite all drawbacks, active ETFs could generate superior risk-adjusted returns, after expenses, if chosen carefully. Fortunately, there have been a few winners in this space, leading to outperformance from a year-to-date look even after adjusting for expenses compared to their well-known benchmark or index-tracking counterparts (read: A Guide to 10 Cheapest ETFs).

Below we have highlighted three ETFs that will continue to result in benchmark-beating returns in the currently stressed world:

Columbia Select Large Cap Growth ETF (RWG)

This fund seeks long-term capital appreciation by investing in large cap securities that Columbia management believes have above-average growth prospects. The portfolio manager combines fundamental and quantitative analysis such as the financial condition of the company, and overall economic and market conditions with risk management, in selecting stocks for the portfolio. This approach creates a basket of 80 securities with the highest allocation going to Apple Inc. (AAPL) at 7.1%, while other firms hold no more than 3.1% share.

From a sector perspective, information technology dominates the portfolio returns with 39% share while health care and consumer discretionary round off to the next two spots at 26% and 16%, respectively. The fund has $11.9 million in AUM and trades in little volume of more than 1,000 shares. The ETF charges 0.83% in fees and expenses from investors and has gained about 8.8% so far in the year. Returns are much higher that the index-tracking counterpart – iShares Russell 1000 Growth ETF (IWF) – which is up 5.3% in the same period (read: 4 Top Ranked Growth ETFs Springing Solid Returns).

SPDR MFS Systematic Core Equity ETF (SYE)

This ETF also seeks capital appreciation by employing bottom-up stock selection and portfolio construction process based on fundamental and quantitative analysis. Holding 43 stocks in its basket, the fund is slightly tilted toward the top two firms – Apple and J.P. Morgan (JPM) – with a combined 9.9% of assets. Other firms hold less than 4% share. The product is widely diversified across various sectors with health care, financials and information technology occupying the top three positions.

It is often overlooked by investors as the fund is relatively new to the market, having debuted in January 2014. As such, the ETF has low AUM of $2.9 million and trades in a meager average daily volume of under 1,000 shares. It charges 60 bps in annual fees, which is worth it as the fund has returned nearly 9% in the year-to-date time frame compared with gains of 2.2% for the passive counterpart – SPDR S&P 500 ETF (SPY).   

ValueShares U.S. Quantitative Value ETF (QVAL)

This product uses a five-step systematic process to invest in the cheapest, highest quality value stocks. Starting with a universe of mostly mid to large cap U.S. stocks, the fund manager first weeds out companies that may incur financial distress or engage in financial statement manipulation (read: Buy Cheap, High-Quality, Winning Stocks via These ETFs).

In the next stage, it applies valuation screens to select stocks with low enterprise value relative to operating earnings. These value stocks are then ranked on their financial strength and long-term fundamentals to arrive at the final list of the cheapest, highest quality stocks. This approach results in a basket of 41 stocks that are spread out across components with none holding more than 2.52% share. However, the fund is slightly skewed toward the consumer discretionary sector at 30%, closely followed by energy (25%) and industrials (15%).

It has amassed $53 million in its asset base since its inception in October 2014 while volume is also paltry at around 15,000 shares. QVAL has justified its higher fee of 79 bps by consistently beating its passive counterpart – iShares Russell 1000 Value ETF (IWD). It has added 5.4% so far in the year, compared with 1.1% gain for IWD.

The three ETFs and their comparison with the passive managed funds are summarized in the table below:









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COLUMBIA SLCGES (RWG): ETF Research Reports
 
SPDR-MFS SCE (SYE): ETF Research Reports
 
VALUSH-US QUANT (QVAL): ETF Research Reports
 
ISHARS-RS 1K VL (IWD): ETF Research Reports
 
SPDR-SP 500 TR (SPY): ETF Research Reports
 
ISHARS-RS 1K GR (IWF): ETF Research Reports
 
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