The active ETF space has gained momentum in recent months. For starters, in early December 2012, the SEC finally ruled that active ETFs would be permitted to hold derivatives in their portfolios.
Since this ruling, we’ve had a number of fund firms asking for permission to offer active ETFs with derivatives, including Hancock, Fidelity and Emerging Global. In addition, companies like Schwab and State Street have been putting an increasing number of active funds into actual registration.
However, long before this ruling, changes to the active-ETF landscape have been brewing.
Since 2011, firms from Eaton Vance to BlackRock filed with the SEC for nontransparent active ETFs, which would enable the managers to disclose the funds’ holdings on a quarterly basis, as opposed to the current daily disclosure requirement for active funds. No one has received the green light yet from regulators.
Then late last month, Precidian Funds became the latest issuer to file for nontransparent active ETFs, proposing a yet-to-be-approved method, like that of BlackRock’s, that would use a blind trust to guard the active manager’s secret sauce.
But with respect to existing active ETFs, I think the launch of the Pimco Total Return ETF (NYSEArca: BOND) in March 2012 is perhaps one of the most significant milestones in the active ETF space.
Just to put into context how successful BOND has been, within the $11.6 billion in total assets in active ETFs—which constitutes only 0.80 percent of the $1.43 trillion in total U.S. ETF assets—BOND’s $4 billion in assets already constitutes more than a third of that amount.
While BOND’s success comes as no surprise considering Bill Gross’s star power, I think what makes BOND so special is its ability to go anywhere in the world, own any type of fixed-income product on any part of the yield curve—a byproduct of its active management structure.
In fact, total assets in active ETFs are overwhelmingly parked in fixed-income products.
Data as of 1/31/13
The issue with many traditional market-value-weighted fixed-income ETFs like the $18 billion Vanguard Total Bond Market ETF (NYSEArca: BND) and the $14.9 billion iShares Core Total US Bond Market ETF (NYSEArca: AGG) is that by design, they overweight securities with the most debt issuance by market value, which basically means Treasurys.
Now, I don’t know of many investors wanting to be overweight Treasurys right now—especially longer-duration bonds—with 10-year yields still below 2 percent and rising since last summer.
But I also think that BOND may have started a new dawn in the ETF world, one in which fund managers begin launching ETF versions of their flagship mutual funds, as ETFs pull more assets away from traditional mutual funds.
Only a few weeks after the launch of BOND, we saw a filing by currency guru Axel Merk to launch an ETF version of his flagship Merk Hard Currency Fund (MERKX), which he plans to call the Merk Hard Currency ETF, and plans to give it the ticker “MERK.”
What’s truly striking is the lack of assets in active equity ETFs—currently only $512 million. That amounts to only 0.05 percent of all equity ETFs assets. One reason for the lack of assets might be because the equity front has yet to make a splash with a famous mutual fund manager, the way Bill Gross launched BOND in the fixed-income space.
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