Until recently, all ETF portfolios replicated indexes and therefore were not actively managed. The goals of active management are to provide returns higher than benchmark indexes, reduce volatility and create more consistent returns. But combining the benefits of the ETF structure with the goals of active management can create new possibilities for actively managed ETFs.
For an industry that began less than two decades ago, ETFs have shown tremendous growth. World-wide ETF assets are approaching $800 billion, and the number of ETF portfolios recently surpassed 1,100.
The United States dominates the global market with more than 70 percent of the $800 billion in world-wide assets under management and just over half of all ETF funds. A recent Morgan Stanley study concluded that Global ETF assets will surpass $2 trillion by 2011. From a historical perspective, the U. S. mutual fund industry took 44 years to reach $450 billion in assets under management, which happen in 1984. By contrast the ETF industry took only 14 years to reach the same level of $470 billion in AUM. Today, there are approximately $570 billion in assets held in ETFs in the United States.
Believed to be among the fastest growing financial products in the world, the popularity of ETFs can be in-part attributed to the many structural benefits including:
- Low Expenses
- Tax Efficient Structure
- Transparency
- Near instant liquidity (NAV reported every 15 seconds)
- Trade at or near NAV
- Purchase on margin, long and short
- Flexible: market/stop/limit orders
The structural benefits delivered with the original ETF format are also present with Active ETFs:
Low Expenses -Transactional costs generally associated with the buying and selling of securities in a mutual fund are substantially reduced by the unique in-kind operational structure used with ETFs. Ordinary brokerage commissions apply when buying or selling ETF shares on an exchange. These costs can be very economical for long-term investors, when compared to an investment with higher annual fees.
Tax-efficient structure -- This allows ETF shareholders to substantially mitigate and or possibly avoid capital gains distributions through an in-kind redemption process until they sell their shares. While active ETFs may trade stocks more often than index-based ETFs, careful management of this in-kind transfer process may give active ETFs the same degree of tax-efficiency that investors would otherwise receive in a traditional ETF.
Transparency -- Active ETFs report their holdings on a daily basis, providing investors with more transparency than investment products that disclose holdings less often -- such as once per quarter.
Near instant liquidity -- ETFs are never closed to investors. ETFs trade like stocks with orders placed and executed throughout the trading day on a stock exchange. Ordinary commissions may apply. ETFs may be purchased using the same types of orders that investors use for stocks, including stop-loss sell orders. Ordinary commissions may apply.
Combining the benefits of exchange-traded funds with the goals of active management has created Active ETFs, a powerful new tool to consider for managing client portfolios.
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