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Actively Managed ETFs Ready for Take-Off


Actively managed exchange traded funds have yet to find a breakthrough into the mainstream investing market. To date, there are about 55 actively managed ETFs trading, which accounts for only 5% of total assets.

“When we look at the ETF structure, there’s nothing inherent about the ETF structure that it says that it has to be passive. Although the preponderance of assets today are actually in passive funds and funds that serve as more of substitutes for single stock trading or single fixed income trading, the reality is that the ETF structure is one that just says that this fund is traded on an exchange as opposed to an open-end structure, which is bought or sold through the fund company or through a wholesaler,” Scott Burns said in a Morningstar interview.

The latest distribution strategy for active management with ETFs is through mutual fund companies that are breaking into the ETF business. The well-known cost-efficiency of passive and active ETFs beat out the price of most mutual funds. Furthermore, many mutual fund providers have seen the market share that is up for the taking within the active ETF industry.

AdvisorShares has the highest number of active ETFs trading currently, with 16 in total, followed by WisdomTree that offers 14 choices. PIMCO follows up with 6 actively managed ETFs and State Street Global Advisors offers 3, reports Juliette Fairley for Financial Advisor Magazine. The many advantages that ETFs offer investors include, but are not limited to, intraday trading, total transparency, lower fees and the flexibility to access corners of the market. [Fidelity Active ETFs Would Gain Market Share]

“Because of the unique operational structure of exchange-traded funds, many cost benefits can be realized at the fund level and passed through to shareholders resulting in lower expense ratios,”Kevin W. Quigg, global head of State Street’s ETF strategy and consulting group said. [ETF Asset Growth Remains Strong in 2012]

In order for the active ETF industry to take off, investor education is necessary to inform potential participants about the structure, risks and benefits. So far, the cost structure of an active ETF has proven beneficial, as the PIMCO Total Return ETF (BOND) has amassed $4 billion in assets under management. The success of BOND has been influential for investors and providers, and has begun to pave the way for the industry. [PIMCO Total Return Ranks Third in ETF Sales Since March Launch]

“It’s always challenging to attract new money because there’s so much uncertainty due to the political and macroeconomic environment that investors are staying on the sidelines,”Alex Gurvich, managing partner of the Rockledge Group said. “There’s a need for education around actively managed ETFs because many investors and advisors are still using mutual funds despite the advantages of ETFs.”

Tisha Guerrero contributed to this article.

Full disclosure: Tom Lydon’s clients own BOND.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.