Ready or not, here comes the next generation of exchange traded funds. Actively managed ETFs, target-risk ETFs and ETFs seeking to reduce or take advantage of volatility are among the promising new products whose arrival in the marketplace has largely been overshadowed by the turmoil of 2008.
ETFs like the PowerShares S&P 500 BuyWrite (PBP), which is based on the CBOE S&P 500 BuyWrite Index, may be poised to find the mainstream ETF market because of its ability to minimize volatility and provide downside protection in a portfolio, says Ed McRedmond of Invesco PowerShares.
Meanwhile, “single-solution-type” target-risk ETFs, akin to target-risk mutual funds with a third-party asset-allocation manager, also soon could be ready for primetime, with rollovers from 401(k)s and IRAs a target market, according to McRedmond.
But the real breakthrough could come with the roll-out of actively managed ETFs. Invesco PowerShares is among the providers to have already unveiled products in that category, including funds that focus on multi-cap, mega-cap, real estate and fixed-income ETFs. While the financial downturn has dampened the debut of those products, McRedmond says the early returns are promising:
“From the AUM side, it’s been a challenge. There’s not a huge groundswell of demand for them yet. People, I think, are taking a wait-and-see approach. But their performance for the most part has been very good. The majority has been outperforming their benchmarks or their closest peers.”
Actively managed ETFs are being positioned to compete directly with mutual funds for investor dollars.
“Basically, it’s about using ETFs as a delivery vehicle for active management,” McRedmond explains. “The ETF structure, we think, is beneficial as a delivery vehicle” because of the edge ETFs tend to hold over mutual funds in terms of fees, tax- efficiency and transparency.
“What if, because of the ETF’s structural advantages, you can capture back some of the returns investors may lose from taxes and internal transactions within the mutual fund structure?” A rhetorical question from McRedmond, but one that that more advisors and investors might soon be asking themselves for practical reasons.