May 24, 2011

Mutual Funds Race to Join Active ETF Fray

Eaton Vance, Blackrock, Janus, AllianceBernstein and Dreyfus all planning rollouts

After watching the exchange traded fund industry streak past $1 trillion of assets recently, a host of mutual fund companies are stepping up their efforts to get into the game—with a more active but pricier product for investors.

The Wall Street Journal’s Jonnelle Marte reports fund giants from Eaton Vance to Blackrock iShares have gotten regulators' approval to roll out what the industry calls more actively managed ETFs. Janus, AllianceBernstein and Dreyfus have sought permission. Last month, Pimco said it would launch an ETF version of its $240 billion Total Return fund.

Marte notes they are seeking to join the still-small group of actively-managed ETFs: funds that trade all day long on an exchange like stocks, but with underlying investments that are chosen, and traded, by a pro. Companies tout their market-beating potential—and charge more for the promise of added returns.

Fans say the new breed of ETFS will give investors a chance to juice returns at a still relatively low price. "It provides much broader and in many cases easier access to a firm like Pimco," Don Suskind, head of the ETF product-management team at the southern-California bond shop, told Marte.

She notes ETFs are popular in part because of their low costs. Critics say the new offerings will lead to higher—not lower—fees for investors. Among the handful of active ETFs already on the market, fees run from 0.35% to 1.85% of assets a year. At the high end, that is almost double the average actively managed large-cap stock mutual fund, and considerably higher than index ETFs, which range from 0.1% to 1%.

Such differences don't matter much for short-term traders, she writes. For long-term investors, a cheaper fund could generate thousands of dollars more in profit—everything else being equal.

Fund companies say all else isn't equal, and that active ETFs will beat the market and earn their higher expense ratios and then some.

Critics say that such funds haven't proven they can make good on that promise. "The whole idea of active management is you're going to beat the market," Rick Ferri, founder of Portfolio Solutions and author of "The Power of Passive Investing, told Marte." That's why you pay higher fees, but the studies confirm that [active ETFs] haven't been beating the market."

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