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More Active ETFs Are Coming to Market

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There will be more actively managed and eventually even nontransparent ETFs coming to market in the future, but not every strategy lends itself to that structure.

That’s one of the main takeaways from a panel at the Inside ETFs conference in Hollywood, Florida.

Actively managed ETFs have a better risk profile in less efficient markets but don’t belong in funds focusing on alternatives, said Shana Sissel, portfolio manager at CLS Investments.

They provide more choice for investors, especially for taxable accounts, said Dodd Kittsley, national director at Davis Advisors funds, whose current ETF lineup includes active and passive funds.

But in order for actively managed ETFs to succeed, price will be key — not too expensive for investors but not so cheap that funds cannibalize the funds they already market.

“The dirty little secret” in the mutual fund industry is that “mutual funds are priced too high,” so an actively managed ETF that’s similar to an actively managed fund but with a lower price point would not be palatable to fund companies’ boards, Kittsley said.

If an actively managed ETF can deliver on performance, however, price will be less of an issue, said Noah Hamman, CEO of AdvisorShares, an investment management firm that offers only actively managed ETFs. But Hamman stressed that fund managers must be mindful when they set their price for an actively managed ETF.

Fund companies offering actively managed ETFs should ideally have a strong track record for performance and a high level of active share, and the managers of the actively traded ETF should own shares of the fund, Kittsley said.

Morningstar research in 2015 found that fund managers who had invested more than $1 million in their own funds tended to have more success than other managers. Forty-eight percent of their funds survived and outperformed their peers over a five-year period compared with 32% of other funds.

Actively managed ETFs, like actively managed mutual funds, should also live up to their name, according to the panel.

“We don’t need an active ETF that’s a closet indexer,” said John Lunt, president of Lunt Capital Management.

Most of the panelists agreed that when — not if — nontransparent ETFs enter the market, there will be a flood of new actively traded ETFs. “More managers see the advantages of the structure,” Sissel said.

ETFs currently must disclose their holdings daily, which is why it’s been said fund companies are hesitant about developing actively managed ETFs. They fear disclosure of their “secret sauce” and front running by competitors, explained Kittsley, but he said those fears were overblown. He said he hasn’t experienced either with Davis’ actively managed equity ETFs.

Kittsley expects to see a “semitransparent” structure for actively traded ETFs rather than a nontransparent one. “Every asset manager has to have an ETF strategy.”

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