The debut this year of the first actively managed equity exchange-traded funds hasn't exactly rocked the mutual fund establishment so far. A handful of funds have launched, but they've attracted relatively few new assets and, for the most part, appear to be little more than trumped-up quantitatively driven portfolios. Whether they eventually find a broader audience will be largely tied to how well they can perform against their passive competitors, and it will likely take years for them to attract any assets.

In the meantime, another, potentially more interesting area is emerging in the world of active ETFs as well: portfolios made up of bonds. In fact, the first actively managed ETF to launch was actually a bond fund, the Bear Stearns Current Yield Fund (AMEX: YYY), which launched on March 25. Its counterpart, the Invesco PowerShares Active Low Duration Portfolio (NYSEArca: PLK), began trading in mid-April.

Active Bond ETFs Face Challenges

Do prospects for bond ETF managers look any brighter than those of stock fund managers? After all, Treasuries and investment-grade corporate issues are highly liquid areas—in some cases, even more closely tracked and traded than stocks—and to the extent that active management works, it seems to work best in inefficient environments.

Early polling doesn't look promising: Neither active bond ETF has been pulling in big assets from investors.

Although its assets aren't readily available on Bear Stearns' Web sites, a May tally of top ETFs by IndexUniverse.com found YYY had about $50.2 million in assets. That's barely above the nearly $50.1 million it started out with (most likely through seed money that Bear Stearns figured it needed to create enough liquidity to launch an ultra-short bond fund).

PLK isn't doing much better, gathering just $2.5 million since its debut on April 11. Three other Invesco PowerShares active equity ETFs that launched the same day have fared similarly, gathering a combined $12.1 million.

To be fair, no doubt much of the rather sluggish response to YYY, PLK and the active stock ETFs is due to a woeful investing environment. But if the economy keeps sinking, YYY and PLK figure to catch at least a little more momentum. Moreover, any increase in headline shocks could actually make a unique opportunity for actively managed bond ETFs at a time when interest rates are still at relatively low levels.

"Active managers tend to outperform when there's a lot of volatility in the market and investors are seeking yield," said David Wong, a senior research analyst at Russell Investments.

Conversely, he added, "Active managers don't do as well when there's a flight to quality in bond markets."

That's just what happened from last summer through mid-March. The jolt of a mortgage meltdown sent Treasuries rallying to a point where PIMCO's star manager Bill Gross referred to them as the most overvalued security on the market. Since then, the rush into government-backed issues has slowed, blunting another headwind working against active bond ETFs earlier in the year.

"Depending on the period in question, it's quite possible to find some very cheap bonds relative to how the market's pricing them. But it also tends to be a very costly enterprise to research and find those bonds," Wong said.

In mutual funds, investors are more willing to pay higher fees to offset such research, Wong notes. "But with ETFs, which are competing in a much-lower-costing marketplace," he said, "it's going to be more difficult for active managers to charge as much as they do under a mutual fund structure."

"While it would appear that active managers should have more opportunities to outperform their respective indexes in more illiquid parts of the market, the data just doesn't bear that out at this point," said Jeffrey Ptak, a Morningstar analyst.

More than liquidity, he believes the success of ETF bond managers will come down to one word: costs.

"The real question facing actively managed ETFs is, how do they broaden their scope from very liquid market segments in a workable manner? I'm not sure that question has been resolved yet," Ptak added.

1 | 2 | 3 |