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October 26, 2016 at 10:56 AM
The choice between active and passive investment management is not an either/or proposition because the lines between active and passive are blurring.
In addition to smart beta ETFs, which impose an active management-type filter over passive index investing, such as an equal weighting of index components, there’s also the actively managed mutual fund that owns index ETFs.
“The lines are being drawn between those that favor ETFs or mutual funds, but less is understood that some mutual funds own ETFs,” says Todd Rosenbluth, director of ETF and Mutual Fund Research at CFRA.
Marketfield Fund (MFADX), a global macro fund with about $1 billion in assets, for example, had 19% of its assets in ETFS at the end of the first half, according to a new report from CFRA Research, which recently acquired the equity and fund research business of S&P.
The ETFs Marketfield owned at the end of the first half included single country funds – for South Korea, Mexico and China – and sector-specific U.S. funds for regional banks and home construction-related companies.
Fidelity New Markets Income Fund (FNMIX), a $5 billion emerging markets debt fund, had a 6% stake in ETFs at the end of June, according to the CFRA report. Its ETF holdings include single country equity funds for Brazil and China and diversified iShares MSCI Emerging Markets stock fund.
The inclusion of these ETFs in mutual funds does more than increase diversity. They also “provide all investors with low-cost exposure to an investment style,” says Rosenbluth. Single country emerging market ETFs such as Deutsche X-Trackers Harvest CSI 300 China A-Shares (ASHR) and iShares MSCI Mexico (EWW), both held by Marketfield Fund, trade with tight bid-and-ask spreads of just one penny.
Rosenbluth says the increasing use of ETFs in mutual funds is a good thing for advisors.
