Jumbo Shrimp. Random Order. Active ETFs.
Actively managed exchange-traded funds -- an oxymoron, right? After all, aren’t ETFs low-cost passive investments that track indexes?
The vast majority are, but after last year’s mega-successful launch of the Pimco Total Return Bond ETF (BOND), actively managed ETFs have begun to take on a higher profile to go along with their higher expenses. While they make up just 1 percent of ETF assets, they account for 19 percent of assets in the 87 ETFs launched this year.
These funds focus on more opaque investment areas where active management is seen as adding value, often in the fixed-income world. Rather than hew to the rules and construction of the index an ETF uses as its benchmark, these managers can tweak portfolios around their benchmark. So they can buy and sell securities whenever they want, for example, instead of having to wait for their benchmark index's periodic rebalancing of member stocks.
Regardless of your stance on the active vs. passive fund management debate, the ETF structure provides several advantages over the mutual fund structure, including better tax efficiency, transparency and intra-day liquidity. Fidelity Investments and Franklin Templeton have active ETFs awaiting the go-ahead from the Securities and Exchange Commission, and iShares just filed for 14 actively managed currency ETFs.
Here's a look at five actively managed ETFs in this year’s freshman class that are either unique or are getting a lot of buzz.
1. SPDR Blackstone/GSO Senior Loan ETF (SRLN)
Investments focusing on senior loans, which offer high yields with floating rates, are in the right place at the right time, since investors are leery of buying fixed-rate bonds when interest rates are expected to rise. While there's already a massive senior loan ETF -- the $5 billion PowerShares Senior Loan Portfolio (BKLN) -- this one adds the twist of active management. That can include screening out loans of companies that are in the fund's benchmark index but that the ETF deems high risk.
The case for active management is strongest in areas like this, where securities aren't traded on an exchange in a transparent way. That's one reason investors have poured $450 million into this fund and made it one of the most successful new launches of this year, or any year. The current yield is 2.8 percent and it has returned .5 percent since its start in April.
SRLN, which holds 154 senior loans, has an expense ratio of 0.90 percent. That seems high next to 0.66 percent for its passive peer, the PowerShares Senior Loan Portfolio. It seems low compared with the 1.47 percent fee for the Invesco Senior Loan Mutual Fund. On average, that pattern holds across the industry, with fees for actively managed ETFs higher than for passively managed ETFs but lower than those of actively managed mutual funds.
2. Cambria Shareholder Yield ETF (SYLD)
Cambria is a small money manager with a big idea. That idea: Shareholder yield, which measures how much money a company sends back to shareholders, shouldn't be based on dividends alone, but should include stock buybacks and paying down debt. This ETF finds 100 companies with good shareholder yield and weights them equally in its portfolio.
The portfolio is an even mix of sectors and market-cap sizes and has a low expense ratio for an actively managed ETF, at 0.59 percent. It's up 8 percent since its launch in mid-May and has $115 million in assets, making it the second-largest actively managed equity ETF. Portfolio manager Mebane Faber is so committed to his shareholder yield concept that he wrote a book about it and has 50 percent of his investable worth in the ETF.
3. PIMCO Foreign Currency Strategy ETF (FORX)
This currency ETF comes from the folks in sunny Newport Beach, California, who brought you the two most successful actively managed ETFs – the Pimco Total Return Bond ETF and the Pimco Enhanced Short Maturity ETF (MINT). FORX is an actively managed currency ETF that has full discretion over what it puts in the portfolio and at what weighting, although there is a 20 percent cap for any one currency. Most investors know little about the complex and massive foreign currency market; it's an area where an experienced manager can add value.
FORX tracks non-U.S. dollar currencies and has large weightings in the Canadian dollar, Norwegian krone, Swedish krona, Russian ruble and Brazilian real. Some $25 million has flowed into the ETF -- a pittance next to Bill Gross’s BOND, but this is much more of a niche ETF. In general, it will struggle the most when the dollar is rising and benefit the most when the dollar is weak. It's down 5.1 percent since it came out in February, and up 2 percent in the past month. The ETF's expense ratio is .65 percent.
4. AdvisorShares Athena International Bear ETF (HDGI)
This is the first active ETF that plans to roam the world looking for opportunities to short, or bet against, stocks. HDGI is run by a Ph.D. with 35 years of investment experience who will look for “low conviction” stocks in international markets. The ETF can be used to hedge the international portion of a portfolio, and provide convenience since shorting stocks takes skill and time.
After launching two weeks ago, HDGI hasn't attracted much money. It has a lot of potential since its concept is similar to the most successful actively managed equity ETF, the AdvisorShares Ranger Equity Bear ETF (HDGE). That ETF, which shorts U.S. stocks, has $200 million in assets and trades over 300,000 shares per day. HDGI is down -.38 percent since its launch in mid-July. The fund has capped expenses at 1.5 percent for the first year; its prospectus lists the expense ratio at 2 percent.
5. First Trust Preferred Securities and Income Fund (FPE)
Similar to SRLN, the idea here is to apply active management to help find yield. Preferred securities are a hybrid in that they trade like stocks but provide a steady income stream like a bond. The current big, passively managed fish in this pond is the iShares Preferred Stock ETF (PFF), which has $10 billion in assets and yields 5.8 percent.
Unlike SRLN, preferred securities are sensitive to rising interest rates. So the value of the ETF could drop if rates rise. Currently, FPE holds 87 securities and has a yield of 4.7 percent. This ETF, which didn’t make a lot of noise when it launched, has attracted $77 million this year. FPE is down 4.2 percent since its launch in February. It has an expense ratio of .85 percent.