Charles Schwab — the man behind the company — believes 98% of us are meant to invest in index funds, whether through ETFs or mutual funds.
Schwab recently discussed index investing in a 19-page paper put out by the Schwab Center for Financial Research. Interestingly, he finds favor with active management when market conditions are the most volatile and investors seek to gain downside protection.
That’s because actively managed ETFs can buy defensively or go to cash reducing losses while preserving capital — index funds can’t.
Choosing the right active manager is far easier when it comes to mutual funds than ETFs, though. According to Olly Ludwig of ETF Report, there are 85 actively managed ETFs in the U.S. at the moment compared to several thousand mutual funds. Heck, Morningstar keeps track of 179 mutual fund companies, more than double the total number of actively managed ETFs in existence.
But good actively managed ETFs do exist. Here are my three favorites:
Actively Managed ETFs – Pimco Enhanced Short Maturity ETF (MINT), Bronze
It’s impossible to discuss actively managed ETFs without discussing one of the two big PIMCO funds — Pimco Enhanced Short Maturity ETF (MINT) and Pimco Total Return ETF (BOND) — which account for about half of the $15 billion currently invested in actively managed ETFs.
Although Bill Gross is a legend when it comes to fixed-income investing, I have to go with MINT because, like Warren Buffett, I agree that bond investments should be kept to a short duration. Of course, the Berkshire Hathaway (BRK.B) CEO was talking about government bonds, but I think you understand where I’m coming from.
MINT is managed by Jerome Schneider, who has been with Pimco since 2008 (before that, he was at Bear Stearns). The fund invests in 645 holdings with average durations and maturities of less than a year, and most of the bonds are of investment-grade quality issued by large, established companies in developed markets.
While bond funds tend to exhibit expense ratios that are typically lower than equity-related funds, its 0.35% MER must be considered a good deal among actively managed ETFs. In fact, ETF Database shows at least 100 bond-related ETFs with expense ratios higher than 0.35%.
At the end of the day, Pimco is the way to go when it comes to actively managed ETFs focusing on fixed income.
Actively Managed ETFs – Cambria Shareholder Yield ETF (SYLD), Silver
This next ETF is just a young ‘un, at a little more than a year old.
The Cambria Shareholder Yield ETF (SYLD) invests in 100 stocks that have market caps of $200 million or more and rank highly in three specific capital allocation activities: cash dividends, net share repurchases and debt repayment.
That third one is especially interesting because it might just preclude Apple (AAPL) from its top 10 holdings given the billions in debt Apple has taken on over the past two years to repurchase shares.
All of these companies, selected for their strong free cash flow generation, do a good job rewarding shareholders. In addition, many of the large-cap stocks that you’ll typically find in large-cap ETFs — such as Exxon Mobil (XOM) — aren’t present. For me, that’s a huge selling point. I don’t want to own XOM, yet it’s found in almost every passive large-cap ETF. Actively managed ETFs allow for independent thinking, and that in my opinion can lead to above-average returns.
Finally, there are two additional points that catch my attention.
The first is that SYLD’s expense ratio is just 0.59%, quite possibly the lowest MER for all actively managed equity ETFs. Secondly, its one-year performance through June 3 is 25%, 310 basis points higher than the SPDR S&P 500 (SPY).
Past performance doesn’t indicate future performance, but it’s a heck of a start.
Actively Managed ETFs – Columbia Select Large Cap Value ETF (GVT), Gold
Despite the fact the two largest actively managed ETFs in America are fixed income in nature (both offered by Pimco), the best one is the Columbia Select Large Cap Value ETF (GVT), a fund that invests in components of the Russell 1000.
In existence since May 2009, GVT has managed to accumulate just $6.6 million in assets under administration over the past five years and currently sits on the ETF Deathwatch list. Despite the lack of faith in some corners, though, Morningstar gives it a four-star rating over a three-year period ending April 30.
There’s plenty to like about this tiny bad boy.
For starters, GVT’s performance compared to the iShares Russell 1000 ETF (IWB) is great. Year-to-date, it’s up 6.8% while IWB has managed just 5.9%. Over the past three years, GVT has delivered an annualized total return of 17.7%, 70 basis points greater than the IWB.
Sure, it hasn’t been through a down market like 2008, but it’s doubtful its two managers — Richard Rosen and Kari Montanus — would do anything that would increase the risk to an unacceptable level.
GVT invests in a total of 36 large-cap stocks, with the top 10 holdings accounting for 37% of the portfolio. In fiscal 2013, which ended October 31, 2013, the duo rarely sold a stock, turning over just 4% of the holdings. At that rate it will have turned the entire portfolio by 2039. With the exception of 2011, which saw a turnover ratio of 143%, there hasn’t been anything over 20%. If you’re looking for something stable this certainly makes sense.
Although GVT is an actively managed ETF, its net expense ratio of 0.74% makes it much cheaper than the average actively managed mutual fund. While it will never cost less than something such as the IWB, it’s not too bad in the realm of actively managed ETFs.
As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.