Are Active ETFs Less Volatile Than Index Funds?

Includes: BOND
by: Tom Lydon

Low-volatility exchange traded fund options have garnered a huge following in a short period as large oscillations in the equities market made individuals more cautious. Investors, though, may even consider actively managed ETFs as returns have been less volatile than that of ETFs tracking an index, according to Lipper.

According to the recent Thomson Reuters Lipper report, titled "Active ETFs 2012," while active ETFs have underperfomed at 2.8% compared to their pure index peers of 3.2% over the past four years, annual returns for active ETFs have been stable in comparison.

Over the last four years, the median active ETF annual performance ranged from 1.3% to 10.8%, whereas the median performance for pure index ETFs ranged from negative 40.1% to positive 55.6%.

Active ETFs do not replicate or passively track an index. A portfolio manager is free to choose securities for the fund's portfolio, according to his or her investment strategy and style.

"Active ETF assets have grown astronomically in the last four years," Sasha Franger, Fiduciary Research Analyst at Lipper, said in the report. "At the end of 2008, active ETF assets totaled $223.9 million, compared to nearly $2.5 billion at the end of 2011. Much of this asset growth traces to newly launched active ETFs."

There are currently 40 U.S.-listed active ETFs.

More recently, large investment managers are beginning to dabble in the space. For instance, PIMCO successfully adapted its flagship Total Return Bond Fund into an ETF, the PIMCO Total Return ETF (NYSEARCA:BOND). Now, iShares and State Street Global Advisors are considering active ETF products.

Max Chen contributed to this article.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.