Next Stage of Growth for Active ETFs: Mergers and Acquisitions as Assets

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 |  Includes: CCX, ELD, HDGE, MINT, WDTI
by: Shishir Nigam

The Dow Jones Industrial rose 2.72% in January 2011, while the S&P500 rose 2.26%. This might not seem like a lot compared to the 6.53% gain in Dec 2010 but it still was the first positive performance for the month of January in 4 years and the best January performance in 14 years.

January was also an interesting month for actively-managed ETFs that saw some of the existing active ETF providers being bought out by large fund companies looking to skip the long line-up to receive exemptive relief from the SEC. Grail Advisors indicated during the month that it is in acquisition talks with an undisclosed firm. Russell also announced that it is acquiring the smallest player in the active ETF space, U.S. One Inc. Both these moves are hinting at impatience with the SEC regulatory approval process that has kept some firms waiting up to two years before they received their exemptive relief to launch actively-managed ETFs. Noticeably, brand new filings from fund companies that are making their first move into active ETFs have also considerably slowed down. This is understandable, considering that quite a few fund companies have already filed their applications in the last year and are still waiting for any progress.

Many industry experts also opined on where they see active ETFs going in 2011, with some suggesting that they could well represent the next phase of growth for the ETF industry. We put forward our own two cents as we made four forecasts for actively-managed ETFs this year. It was also interesting to analyze how the active ETF asset mix has evolved over the last six months, with fixed-income funds as well as alternative strategies gaining a lot more momentum.

Fund Flows:

(Click table to enlarge)

January saw the combined asset base of 35 actively-managed ETFs in the US increase by about 10% to $3.3 billion after it crossed the $3 billion market in Dec 2010. PIMCO’s Enhanced Short Maturity Fund (NYSEARCA:MINT) (100.754 -0.06%) continued to see strong inflows with another $85 million entering the fund this month even though the markets were up. MINT’s asset base generally has an inverse correlation to the markets as it is seen as a money-market alternative by investors. It now stands at $871 million, an all time high, and closer still to the $1 billion mark. WisdomTree also saw quite a lot of success with its most recently launched funds. Its Emerging Market Local Debt Fund (NYSEARCA:ELD) (50.74 +0.46%) saw close to $60 million in additional flows, bringing its assets to $626 billion making it the 2nd largest Active ETF in the U.S. That reflects the amount of interest investors have shown in the gaining emerging market exposure. WisdomTree’s Commodity Currency Fund (NYSEARCA:CCX) (26.095 +0.71%) also saw surprisingly strong inflows of $90 million even as their other currency funds have seemingly stagnated. AdvisorShares’ Mars Hill Global Relative Value (GRV) (23.45 +0.04%) though seemingly lost some of its lustre as it saw outflows of $7.5 million during the month.

January also saw the launches of two new actively-managed ETFs, both of which were the first of their kind. AdvisorShares brought to market the very first actively-managed short-only equity ETF in the Active Bear ETF (NYSEARCA:HDGE) (24.76 -1.20%), managed by Ranger Alternative Management. HDGE has already seen $12 million in flows within a week of its launch. WisdomTree launched the very first managed futures fund in the active ETF space, called the WisdomTree Managed Futures Strategy Fund (NYSEARCA:WDTI) (50.90 +0.66%), which has already gathered $20 million in assets.

(Click table to enlarge)

In Canada, Horizons AlphaPro continued its growth in the absence of any meaningful competition from other Active ETF providers. It increased its combined asset based to $464 million as it successfully completed the conversion of the Tactical Bond ETF (HAF) from a unit trust into an open ETF. AlphaPro had also launched a Floating Rate Bond ETF (HFR) in Dec 2010 that now has just about $10 million in assets.

New Entrants, Filings and Closures:

1. AdvisorShares plans new Tactical ETF – direct link

2. T. Rowe Price modified application for Diversified Bond ETF – direct link

3. AllianceBernstein removes derivatives from ETFs – direct link

4. Grail Advisors indicates pending acquisition – direct link

5. Russell plans acquisition of U.S. One Inc. – direct link

6. AdvisorShares files for TrimTabs ETF and cuts expenses on GTAA – direct link

Disclosure: No positions in above-mentioned names.

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