Well, it finally happened. The U.S.
ETF market got its first actively managed
exchange-traded fund this spring
when the much anticipated Bear
Stearns Current Yield Fund (AMEX:
YYY) launched on March 25. The fund,
which charges an expense ratio of
0.35 percent, invests in short-duration
U.S. government and corporate debt,
targeting an average duration of 180
days. It functions more or less like an
actively managed money market fund.
YYY's launch was quickly followed
by the launch of four new actively
managed ETFs from Invesco Power-
Shares. Three of the new funds are
stock funds.
The PowerShares Active AlphaQ
Fund (NYSE Arca: PQY) selects its
holdings from the NASDAQ Stock
Exchange based on a proprietary
quantitative model developed by
AER Advisors; it is mainly a large-cap
growth fund. The PowerShares Active
Alpha Multi-Cap Fund (PQZ), also
advised by AER Advisors, holds stocks
from all size and style segments and
those listed on any U.S. exchange.
Both PQY and PQZ are restricted to
making a limited number of trades on
a weekly basis.
The third equity fund, the Power-
Shares Active MegaCap Fund (PMA),
is a quantitative fund managed by
PowerShares' parent company, Invesco.
All three of the stock funds charge
expense ratios of 0.75 percent.
The fourth PowerShares fund, the
PowerShares Active Low Duration
Fund (PLK), is a fixed-income fund
that targets a duration of 0–3 years.
It charges an expense ratio of 0.29
percent. PLK is also managed by PowerShares'
parent, Invesco.
The obvious question is what distinguishes
these funds from the other
quantitative funds from PowerShares,
such as its flagship Dynamic Market
Intellidex (AMEX: PWC). The answer is
that these new funds do not track an
index, which should help them avoid the
potential problem of ''front-running.''
In regular index-based ETFs, the
index provider publishes the changes
to the index in real time, and the
fund must then trade to match those
changes. Enterprising hedge funds
can and do step in front of funds and
profit from the incipient demand.
The new active funds will be able
to make trades during the trading
day, but those trades won't be made
public until after settlement the following
day. That one-day window of
silence is the key reason PowerShares
launched these funds.
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