More On Actively Managed ETFs

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I am reading “Actively managed ETFs pique interest of big fund companies:”

The actively managed exchange-traded-fund market is expected to explode as top mutual fund companies, including Putnam Investments, John Hancock Funds LLC, T. Rowe Price Group Inc. and Pacific Investment Management Co. LLC, consider entering the business or expand their lineups.

The number of actively managed ETFs is likely to rise from the current 15 to more than 40, while the number of providers offering such funds could go from seven to 15, according to Rob Ivanoff, an ETF analyst at Financial Research Corp.

“Every big fund company is looking at this,” said Cindy Zarker, director of research at Cerulli Associates Inc.

Many asset managers have held off launching actively managed ETFs because of concerns about the effect that daily disclosure of their holdings would have on the shareholders of mutual funds that the ETFs mimicked. Other asset managers, while now unsure of demand for actively managed ETFs, want to hedge their bets in case mutual fund 12(b)-1 fees are abolished and brokers are more willing to try the new product.

For the most part, advisers have taken a wait-and-see attitude toward actively managed ETFs, intending to hold off until the products can post at least a one-year or three-year track record. But some say that reluctance may be ebbing.

Many investment management companies are discussing getting around the track record hurdle by converting their mutual funds to ETFs, said William M. Thomas, chief executive of Grail Advisors LLC, which has five actively managed ETFs.

“We are working with several mutual fund companies that are contemplating converting mutual funds to ETFs because they have solid, strong performance and are in a crowded marketplace where they are one of 250 large-cap-growth stock funds,” he said.

Pimco, which launched its first two actively managed ETFs last year, has registered to launch three more this year: the Pimco Government Limited Maturity Strategy Fund, the Pimco Prime Limited Maturity Strategy Fund and the Pimco Short Term Municipal Bond Strategy Fund.

The company also has had discussions about launching an ETF version of its giant Total Return Fund, said Don Suskind, a vice president and head of the ETF product management team.

[Emphasis added]

It’s an interesting concept that some mutual funds may convert to ETFs. That confirms my long-held belief that if mutual fund companies don’t come off their high horse and offer lower fees along with less restrictive trading policies, their days may be numbered.

If actively managed ETFs can attract enough followers over time, and offer a wide variety of low cost products, which they will, there would be no reason to ever buy a mutual fund again.

I am following these developments closely, but will not add any of these types of ETFs to my data base until I see at least 9 months of price history along with acceptable average daily trading volume. To me, that number has to be at least $4 million before I even consider modest exposure—assuming, of course, that the trends support such a move.

Overall, these are positive developments for the individual investor and for trend tracking in general. Of course, I can hear the new battle cry, which no longer will be whether mutual funds are better than ETFs, but whether managed ETFs are better than indexed ETFs.

As always, these comparisons are downright silly because the author usually has an axe to grind. I have found in the past that at times mutual funds will outperform ETFs and vice versa.

It’s more important to use the most appropriate instrument when making an investment. Momentum figures, such as I publish in the weekly StatSheet, may make it easier for you to make that decision.

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