As many well-known issuers like PIMCO, Vanguard, Claymore and many others line up to bring their actively-managed ETFs to market, it appears that these relatively new products are poised for a strong growth phase. With major regulatory hurdles out of the way, and with the SEC having already approved about 15 active ETFs that have started trading, subsequent filings and approvals should take much less than the 2-3 years it took the pioneer, PowerShares, to bring their products to market.
Having passed the initial hurdles, active ETFs are at a crossroads where their growth could explode from here, or become tepid and non-existent. Much of that depends on how new issuers grasp two huge opportunities that Active ETFs are presented with today.
1. Penetrating the $12 trillion mutual fund market
The US mutual fund industry currently manages in excess of $12 trillion in assets, with global mutual funds managing more than $26 trillion. In comparison, Active ETFs in the US currently manage about $200 million. Now, more than 95% of mutual funds are in fact actively-managed. At the same time, many studies have shown that active mutual funds have failed to beat the market benchmark they follow, over an extended period of time, after deduction of fees. This is where the big distinction between actively-managed ETFs and active mutual funds comes in.
The average expense ratio for an active mutual fund, according to Lipper, is 1.21%. In contrast, the average expense ratio for existing actively-managed ETFs is 0.70%. By those numbers, that provides for an immediate cost benefit (and hence return benefit) of 0.51%. To look at a direct example, even in the fixed-income markets where mutual funds usually have lower expenses, active ETFs do better – PIMCO’s recently launched Short Term Municipal Bond Fund (NYSEARCA:
