This morning's Wall Street Journal features an Eleanor Laise article on a few new entrants in the category of actively-managed ETFs. We aren't crazy about the concept, largely because we think ETFs work best as part of a strategic asset allocation program with rock-bottom expenses. Here's a telling passage on that front:
Many investors are attracted to ETFs because of low costs. But the new Grail funds will each charge annual expenses of 0.89% of assets, making them pricier than three-fourths of the ETFs tracked by investment-research firm Morningstar. Grail American Beacon Large Cap Value charges 0.79%, only marginally cheaper than the 0.83% charge by investor shares of the nearly identical American Beacon Large Cap Value mutual fund. And the Dent Tactical ETF charges 1.56%. That is more than the average diversified U.S. stock mutual fund.
Roughly one quarter of ETFs have explicit annual expenses of more than 0.89%? Yikes. Then there's this:
Investors haven't flocked to actively managed ETFs. The Grail American Beacon Large Cap Value ETF has roughly $3 million in assets, and the five active PowerShares products have just over $24 million combined.
Brutal. If those numbers don't change soon, these little experiments won't last much longer. What about early returns from these things?
Performance that has lagged behind hasn't helped. PowerShares Active Alpha Multi-Cap Fund is down 21% in the year ending Monday, trailing the Standard & Poor's 500-stock index by 11 percentage points. PowerShares Active AlphaQ Fund is down 3.6% over that period, while its primary benchmark, the Nasdaq 100, gained nearly 4%.
Not a pretty picture. But some sponsors appear undaunted.
Despite the challenges, active ETF providers are aiming high. Grail aims to launch 24 to 30 new active ETFs over the next year or so, said Bill Thomas, the firm's chief executive. And over the past year, the firm has been talking to conventional actively managed mutual funds about converting to an ETF structure.
That's an interesting concept. Many of Vanguard's ETFs are simply different "share classes" of the firm's traditional mutual funds. We'll stay tuned to see if other open-end managers try to break in with ETF versions of their actively-managed funds.
UPDATE: ETFs are growing quickly, but they still occupy a small corner of the investment world. Here are a couple 2008 posts comparing ETFs and index-based vehicles to actively-managed, open-end funds:
Eleanor Laise, "Grail's ETFs Take 'Active' Approach," Wall Street Journal, September 30th, 2009