Can Actively Managed ETFs Gain Traction?

Also, when large financial services firms like PIMCO and State Street Global Advisors offer actively managed ETFs, this attracts investors’ attention to the category and validates the structure. The SPDR DoubleLine Total Return Tactical ETF (TOTL), for instance, has about $2.8 billion in assets.

Hamman points out that his firm’s funds are not competing with the passively managed and indexed ETFs, which hold about 98% of ETF assets. Instead, his target market is investors who want to combine active management in focused investment strategies with ETFs’ cost and tax advantages.

Luciano Siracusano, chief investment strategies with ETF sponsor WisdomTree in New York, is also optimistic about growth prospects for actively managed ETFs. He believes that investors remain open to using active fixed-income portfolio managers, particularly in light of the potential for U.S. rates to move higher.

Traditional fixed-income ETFs generate their applicable benchmark index return, he says, but that approach has shortcomings in a period of rising rates.

“Fixed income indexes can perform really well when interest rates are declining,” Siracusano said.

“But, if you get a period where interest rates back up and there’s some dislocation in the market because some people are selling indexed-based ETFs, that could create some pricing displacements of underlying securities. It could create an environment where active managers actually can navigate and take advantage of any mispricing that’s happening,” he explained.

A Looming Shakeout?

ETF industry sources say a fund needs a minimum AUM ranging from $25 million to $100 million to be profitable, depending on the sponsor’s operating costs and profit goals.

If the $25 million amount is accurate, about half the actively managed ETFs are on the fence. It will be interesting to see if the segment’s growth trickles down to the smaller funds; if it doesn’t, the dominance of large funds is likely to continue.