Since debuting about a year ago, exchange-traded funds that are actively managed have gotten off to a slow start.
The first folded after seven months. Those currently on the market from Invesco PowerShares have performed relatively well, but market turmoil, a narrow track record and investors' unfamiliarity with the concept of actively managed ETFs have kept assets low.
"I don't think the market is ready for it just yet," said Ronald Rowland, the president of Capital Cities Asset Management Inc. in Austin.
The first actively managed ETF, the Bear Stearns Current Yield fund, debuted in March of last year but closed in the fall after failing to attract enough investors. Such funds had been anticipated for years as an important rival to mutual funds. If they can deliver the same range of returns as mutual funds, their additional advantages would include lower fees and taxes, as well as more flexibility and transparency.
Invesco PowerShares launched four funds in April of last year and another one in November. At the end of January the funds had $14.6 million of assets under management. Other ETFs, from advisers and sponsors such as Invesco PowerShares, Grail Advisors LLC, American Beacon Advisors Inc. and State Street Corp., are awaiting approval from the Securities and Exchange Commission.
Rowland said the four PowerShares launched in April of last year are on the ETF "death watch" list he maintains online. The list includes funds with low average daily trading volumes and average daily values traded.
He acknowledged that big backers like Invesco PowerShares can support funds through a long lean period if necessary.
Ed McRedmond, senior vice president of portfolio strategies at Invesco PowerShares, acknowledged that its funds have modest asset levels so far, but he said the situation is not much worse than anticipated. "We wouldn't say we're thrilled" about the asset levels, "but it also wouldn't be way out of our expectations."
In addition to the other normal hurdles new products face in trying to gain their footing, the active funds lack the one- to three-year track records that many investors seek, including institutional ones.
"We don't expect a big institutional demand for these products initially," McRedmond said. Most of the early interest is expected to come from individual investors and financial advisers.
But the early performance has been encouraging, he said. "We've been very happy with the way they are performing relative to their peers."
IndexUniverse.com, a Web site operated by Index Publications LLC, found that four of the PowerShares active ETFs outperformed their closest passive rivals from the beginning of January through mid-March.
More education about the benefits of active ETFs should help the products gain traction, McRedmond said.
Definitions of "active" ETFs vary widely. Some say funds that incorporate quantitative-based methodologies — as PowerShares' funds do — do not fully qualify.
"What I'd call a true active ETF" remains in the future, said Jim Ross, senior managing director at State Street Global Advisors.
McRedmond argued that many active mutual fund managers also use quantitative screening. "That's really no different from what's going on with these actively managed ETFs."
PowerShares' active ETF managers "can trade every day," he said, though he acknowledged they do relatively few trades on a daily basis. At the same time, many managers of supposedly active mutual funds "brag about holding stocks for three years."
One of the challenges of creating active funds is building a structure in which the manager will not tip the fund's hand while satisfying the SEC's expectation of transparency. PowerShares' funds disclose their holdings once daily. Industry experts say approval of some other funds has been delayed because they are designed to provide more of an advantage to the managers.
The early active funds present a test case for the fear that investors and advisers will copy their holdings rather than buying shares.
PowerShares' active funds give "the manager the day to make his trades," McRedmond said. "We don't expect there will be a lot people trying to game that," because that would mean betting the manager will maintain the same pattern of buying or selling the next day.
