The investing world has been witnessing tectonic shifts lately with improving global economic fundamentals. Investors' sentiments are now not the same as they were just after the financial meltdown in 2008.
The scenario has also been changing in the ETF corner. Issuers are turning more innovative and intend to come up with products that are more dynamic and suit the current improving - but volatile - market conditions.
Earlier, the area used to be dominated by passively managed or index-tracking funds. Their low cost and transparent structure made them highly coveted. Active funds are arguably expensive as these involve research expenses associated with the manager's due diligence and additional cost in the form of a wide bid/ask spread beyond the expense ratio.
However, lately, there has been a surge of actively managed ETFs in the $2.89 trillion industry. There are a total of 188 unleveraged active ETFs in the space with total AUM of nearly $36.18 billion. The figures more than doubled in the last three and a half years.
As per etf.com, there were not many vanilla ETFs that entered the market in May. Be it the Cambria Core Equity ETF (NYSEARCA:CCOR), or the ClearBridge Dividend Strategy ESG ETF (NASDAQ:YLDE) or the Principal Active Global Dividend Income ETF (BATS:GDVD), these are mostly actively managed in nature.
Why The Surge?
Changing market dynamics makes it important for issuers to roll out smart and actively-managed ETFs. It is possible only this way to dodge the losing proposition and ongoing volatility in the market and enjoy solid gains.
One of the major drawbacks of actively-managed ETFs, higher fees, are now coming down. In any case, industry players like BlackRock, Fidelity and Vanguard are competing to slash fees for all types of products lately.
The etf.com article specifically pointed out that "GraniteShares' commodity ETFs are also active, and they came to market with some of the lowest expense ratios in the commodities space-0.25%." Blackrock recently cut the expense ratio of the active ETF the iShares Ultra Short-Term Bond ETF (BATS:ICSH) from 0.18% to 0.08%.
"As investors have access to live and transparent market pricing with active ETFs, in most cases they are better at providing accurate and up-to-date data feeds to the major portfolio reporting," as per the source.
Moreover, the actively-managed industry is still budding and untapped while the passively-managed ETF industry is teeming with products. As a result, issuers are thronging this space.
However, one of the major drawbacks of actively-managed ETFs is the obligation of the disclosure of daily portfolio holdings, which run the risk of enabling "front-running" of portfolio trades. This means that the revelation of stock holdings will give the issuer's competitors or other investors the chance of cashing in on advance information.
Top-Performing Active ETFs So Far This Year
Some of the top-performing active ETFs of this year (as of May 30, 2017) are the ARK Innovation ETF (NYSEARCA:ARKK) (up 40.35%), the ARK Web x.0 ETF (NYSEARCA:ARKW) (up 39.55%), the ARK Genomic Revolution Multi-Sector ETF (NYSEARCA:ARKG) (up 19.37%) and the First Trust RiverFront Dynamic Emerging Markets ETF (NASDAQ:RFEM) (up 19.34%).