by Tom Taulli | August 6, 2012 2:40 pm
The market for exchange-traded funds has surged in popularity during the past decade, with assets now over $1.5 trillion.
That growth is no fluke. ETFs offer both affordability and access, as they typically have low fees and track just about any type of market, from stocks to bonds to commodities.
Still, the exchange-traded world isn’t perfect. Perhaps one its biggest flaws is that many ETFs are based on indexes — in other words, investors miss out on the potential to get higher returns from elite portfolio managers.
However, there is a small but growing solution: active ETFs, which, just like mutual funds, sport portfolio managers trying to find the best investment opportunities.
According to Bloomberg, popular fund provider Fidelity is making a big move into the active ETF space. The initial push will be through ETFs imaged after its “Select”-branded mutual funds, which focus on a myriad of market sectors, such as the Select Biotechnology Portfolio (MUTF:FBIOX), Select Technology Portfolio (MUTF:FSPTX) and Select Wireless Portfolio (MUTF:FWRLX).
Many of the Select funds have top-notch portfolio managers with strong track records — so while you likely won’t get the screamingly low fees of similarly flavored index ETFs, the active ETF structure should mean somewhat lower fees than the equivalent mutual funds.
Also, Fidelity’s marketing machine inevitably will make active ETFs more of a household name, which should help the market expand — and thus, one can expect other mutual fund companies to follow with their own offerings.
And the market definitely has room to expand. Of the roughly 1,500 exchange-traded products available in the U.S., only about 50 are actively managed ETFs with just about $8.8 billion in assets.
Still, a few funds have gained traction in the field, though the most popular players are in bonds. Bill Gross’ PIMCO Total Return ETF (NYSE:BOND) is the biggest player in the market, managing assets of $2.4 billion. Another PIMCO fund — the PIMCO Enhanced Short Maturity Strategy Fund (NYSE:MINT) — boasts nearly $2 billion in funds, and the WisdomTree Emerging Markets Local Debt Fund (NYSE:ELD) has about $1.2 billion under management. So there’s at least some money to be made.
There’s still a few hurdles in the way of active ETF growth. Many 401k plans are limited to regular mutual funds, and financial planners probably still will continue to recommend these investments, as the commissions will be higher.
But the fact remains there are massive amounts of assets in IRAs as well as regular accounts. So when investors start to look at the advantages of active ETFs — namely, professional management with lower fees — there will be a shift away from mutual funds. All in all, the growth of the managed ETF business looks like a lock.
Tom Taulli runs the InvestorPlace blog IPOPlaybook, a site dedicated to the hottest news and rumors about initial public offerings. He also is the author of “All About Short Selling” and “All About Commodities.” Follow him on Twitter at @ttaulli. As of this writing, he did not own a position in any of the aforementioned securities.
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