Rick Ferri is a contributor to Forbes and the founder of Portfolio Solutions, a provider of low-fee investment-management services. In his March article, Does Anyone Really Care about Actively Managed ETFs?, Ferri argues that only $5 billion of $1.1 trillion in ETF assets is invested in actively managed funds. Further, he says, active still can’t beat passive when it comes to investing, so why should bother with them?
He might be right, but for those who still believe in the power of active management, I’ll look at three of the cheapest of these funds, selecting one each from equity, bond and all other asset classes.
The lowest-cost equity ETF I could find is the Russell Equity ETF (NYSE:ONEF) at 0.52%. I like it for a slew of reasons — not just because it’s cheap.
First off, it’s managed by Russell Investments, which has been around since 1936, offering investment solutions to institutions and individuals alike. Secondly, it’s composed of 10 ETFs from iShares and Vanguard, with 62% invested in U.S. stocks and the rest in international equities. Three-quarters of the portfolio is invested in large-cap stocks, with the remainder in mid-cap stocks or smaller.
If you believe in blue chips, this is the fund for you. In terms of performance, ONEF has achieved an annual total return of 9.33% since its inception in May 2010. That’s 385 basis points lower than the S&P 500 Index and 16 basis points lower than the Russell Developed Large-Cap Index, its benchmark. However, with only two years under its belt, the fund has plenty of time to narrow that gap. Yield chasers won’t be impressed with its 2.1% 30-day SEC yield, but given that its mandate is long-term capital appreciation, that’s plenty.
Lastly, despite being actively managed, its turnover is relatively benign at 6% per year. This is an easy-to-understand fund-of-funds that covers the world.
It’s tempting to go with a big name, such as bond guru Bill Gross’ PIMCO Total Return ETF (NYSE:BOND), which charges 0.55% and is one of the biggest actively managed funds. Unfortunately, the $1.6 billion in assets amassed in just a few months is invested in no less than 554 holdings. That’s a lot to keep track of even for a superstar manager.
So why not go for something a little more manageable, such as the Guggenheim Enhanced Core Bond ETF (NYSE:GIY), which charges 0.27% and currently has just 28 holdings. That will change over time as it brings in more assets, but for now it holds a very manageable number of securities. With over four years as an actively managed fund, GIY’s performance is good, delivering an annualized total return over the past three years of 8.8% — 180 basis points higher than its benchmark, the Barclays US Aggregate Bond Index.
A majority (64.43%) of the holdings are in AAA-rated corporate or government securities, and the fund has a 30-day SEC yield of 1.72%. Using a combination of quantitative security selection, fundamental credit analysis and sector analysis, GIY is able to take advantage of mispricing in many of its holdings. Passive investors point out that over the long term, the index will do better. So far, that hasn’t been the case.
Lastly, there’s the PowerShares Active US Real Estate Fund (NYSE:PSR), which, as far as I know, is the only actively managed real estate ETF. Compared with the 30 or so active ETFs out there, it’s clearly not cheap at 0.80%. However, since it’s the only fund of its kind, it’s cheap relative to its peers! And if you want another asset class besides equities and fixed income, real estate is it — there’s no other game in town.
Created in November 2008, PSR has 50 holdings spread across various types of REITs, including specialized, retail, residential, office, industrial and diversified. The No. 1 holding is Simon Property Group (NYSE:SPG) at 10.5% of the portfolio, 514 basis points higher than the second-largest holding. According to PSR’s prospectus, its turnover in 2011 was 37% — far less than the 85% rate achieved by the average actively managed mutual fund.
Its performance over the past three years as of June 25 is an annualized total return of 30.8%, almost double the S&P 500. I’m not sold on actively managed real estate funds being able to outperform their cheaper indexed counterparts. I’d be inclined to use a passive index fund in this situation since you can pick one up for a quarter of the cost.
But if you want active, this is the only way to get it.
As of this writing, Will Ashworth did not own a position in any of the stocks named here.