Opportunities Abound In The ETF Arms Race
The Dynamic Wealth Report
July 23, 2010
by Corey Williams, Editor
It’s truly amazing to watch the ETF industry blossom. ETF
providers are constantly rolling out new and inventive products. All in
an effort to capture more of your investment dollars.
As the resident ETF expert around the office, my email inbox is always
filled with questions about new ETFs. Colleagues and readers alike want
my opinion on the latest product launches.
And for good reason… the ETF industry is evolving at breakneck speed.
You can invest in just about any asset class with an ETF these days.
Stocks, bonds, currencies, commodities, treasuries, precious metals, and
even MLPs are all easily accessed by using ETFs. ETFs that can be bought
with your run of the mill brokerage account. It’s opened up a lot of
markets previously off limits to most individual investors.
The evolution of the ETF market is showing no signs of slowing down
either. The arrival of actively managed ETFs is transforming the
industry once again.
You might have seen or thought about buying one of these new ETFs. I’ll
tell you what I think of them in a minute.
First, what is an actively managed ETF?
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Actively managed ETFs are more like mutual funds than traditional ETFs.
Traditionally, ETFs are passively managed. That means they track an index
like the S&P 500, the price of gold, or the value of a currency
versus a basket of other currencies.
The only time the fund’s holdings are adjusted is when the index changes
or when the ETF is rebalanced.
But actively managed ETFs are an entirely different breed.
Actively managed ETFs combine the benefits of ETFs like intraday
trading, tax efficiency, fund transparency, and liquidity with active
management.
It also means someone’s picking and choosing the ETF holdings. The
manager or investment team uses traditional portfolio management in an
attempt to outperform a benchmark.
We’ve already seen some popular ETF families like PowerShares and
WisdomTree jump into the actively managed scene. And we’ve seen the
advent of fund families like AdvisorShares who only offer actively
managed ETFs.
So far, actively managed ETFs popularity has been limited. But that could
be changing.
Several of the leading mutual fund providers are leading a charge into
actively managed ETFs. Some of the largest asset managers like T. Rowe
Price and Legg Mason are moving into the ETF business.
News of big mutual fund companies moving into the ETF business has
sparked an arms race in the industry. It’s driving big passively managed
ETF providers like iShares to begin working on their own line of
actively managed ETFs.
Once these major players launch their products, the popularity of
actively managed ETFs could explode.
Personally, I’m a little bit skeptical about actively managed ETFs.
There are only a handful of managers who have shown the ability to
consistently beat an indexed strategy.
I have to ask… Why would the most talented stock pickers in the world
choose to work for an ETF instead of a hedge fund?
They surely won’t be able to generate anywhere near the fees they do in
the hedge fund world. (ETF investors are notoriously stingy when it
comes to paying high expense ratios.)
And then there’s the question of transparency.
Passively managed ETF providers provide updated holdings on a daily
basis. Investors always know exactly what they’re investing in.
Will actively managed ETFs provide this level of clarity as well?
I can’t imagine managers being happy about disclosing their strategy on
a daily basis.
The only way actively managed ETFs get around these obstacles is by
increasing fees and limiting the clarity of the holdings. This defeats
two major benefits of investing in ETFs in the first place.
The bottom line is a bunch of new actively managed ETFs are coming.
There are sure to be plenty of new and exciting opportunities. But don’t
be too quick to jump on the bandwagon. Give these new ETFs time to
develop a track record first. Then you’ll be able to tell if they truly
add value.
• Human Genome Sciences (HGSI)
was upgraded by Robert W. Baird from Neutral to Outperform. HGSI’s new
potential blockbuster drug for lupus makes the company an attractive
takeover target. The analyst set a $32 price target on the stock.
• Estee Lauder (EL) was downgraded by Stifel Nicolaus
from Hold to Sell. The analyst says expectations for fiscal 2011 are too
optimistic. The shares are up more than 75% in the past year.
• Wedbush initiated coverage on Green Dot (GDOT) with
an Outperform rating. Shares of the prepaid debit card provider are up
more than 22% from yesterday’s IPO price.
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