One of the best parts about exchange-traded funds (ETFs) is their low costs — thanks in part to their index-hugging attributes. After all, there have been countless studies showing that active management loses big-time to index funds. Much of that outperformance comes down to costs. And with some index ETFs now charging less than 0.05% in expenses, indexing’s dominance is almost assured.
But that hasn’t stopped some ETF sponsors from launching actively managed ETFs.
As expected, most actively managed ETFs have fallen flat as the combination of human judgment and higher fees have led to their underperformance.
But not all actively managed ETFs are junk. The combination of the right manager plus the slightly lower expense ratio of using an ETF structure has given some funds a leg up on performance. Performance that has them besting many of their benchmark indexes and rival actively managed mutual funds.
With that in mind, some actively managed ETFs are actually worth betting on as side plays or diversifiers. Here are three that investors may want to consider.
Actively Managed ETFs That Are Worth It: AdvisorShares Focused Equity ETF (CWS)
Expenses: 0.75%, or $75 per $10,000 invested.
Don’t let the goofy graphic at the top of his Crossing Wall Street Blog fool you. Eddy Elfenbein has some serious financial chops.
Elfenbein has been running run his blog since 2006, and the core theme of the publication has been cutting through Wall Street’s B.S. and focusing on long-term investing.
The “buy and homework” style of the blog is summed up in Elfenbein’s annual Stocks Buy List. Elfenbein looks for those stocks that are fundamentally sound and have high earnings quality and strong histories of sales growth, as well as long stretches of dividend increases. All the common-sense stuff, we really all should be focusing on. Many of the stocks on the list have been there for years.
The proof in the pudding. The Buy List’s compounded total return over the last ten years has been 163.67%. That’s versus just 102.42% for the S&P 500.
Elfenbein’s simple, but effective, strategy can be had in one of the best actively managed ETFs you can buy — the AdvisorShares Focused Equity ETF (NYSEARCA:CWS).
CWS owns all 20 stocks on the Buy List and is balanced just once a year, like the blog, so it should match Elfenbein’s outperformance. And given that the ETF charges just 0.75% or $75 for every $10,000 invested, it should match that performance pretty closely.
For investors looking to beat the S&P 500, CWS is one of the best actively managed ETFs you can pick.
Actively Managed ETFs That Are Worth It: First Trust North American Energy Infrastructure Fund (EMLP)
The painful dividend cuts at some of the largest master limited partnerships (MLPs) over the last year has shown that an index solution may not be the best choice for investors tackling the sector. And when it comes to MLP actively managed ETFs, the First Trust North American Energy Infrastructure Fund (NYSEARCA:EMLP) is the only game in town that investors should consider.
The key for EMLP — and its five-star Morningstar rating — is that it is a total midstream focused fund. That means, it owns MLPs like Enterprise Products Partners L.P. (NYSE:EPD), as well as other infrastructure/midstream stocks. This includes utilities, pipeline owners structured as c-corps, Canadian income securities and preferred stocks. EMLP’s management looks for those firms that have a history of both great current distributions and meaningful dividend growth behind them.
The ETF will hold a maximum of 60 stocks, with at least 50% of total assets allocated to pipeline, while 30% is allocated to utilities.
EMLP has been a great performer as well. The actively managed ETF has returned 9.32% since its inception in 2012. While that has lagged the S&P 500, EMLP has managed to beat its benchmark and has provided a less bumpy ride. That smoother ride could make it worth the 0.95% in expenses.
Actively Managed ETFs That Are Worth It: iShares Commodities Select Strategy ETF (COMT)
A lot has been written about commodities being great diversifiers for your portfolio. However, many funds — both indexed and actively managed ETFs — have fallen flat when trying to access them. The iShares Commodities Select Strategy ETF (NASDAQ:COMT) takes a unique and active approach to adding that exposure.
The ETF is designed to provide a total take on natural-resource investing. That includes actively betting on futures contracts through a Cayman Island subsidiary — to save on tax headaches — and owning commodity producing equities like Exxon Mobil Corporation (NYSE:XOM) or BHP Billiton Limited (ADR) (NYSE:BHP). The idea is that the managers can shift through opportunities — in both equity and futures — to make the best decision on how to profit from a certain commodity. Oil futures rising? Buying shares in a beaten down shale producer might be a better bet than buying WTI near dated futures.
It terms of performance, COMT’s operating history is pretty limited. It launched in the middle of the crude oil rout. As a result, its one-year performance is at 2.17%. However, that still has managed to outperform rival commodity funds, and it has gained over 15% year-to-date. The longer-term picture looks rosy as well.
In the end, iShares may have unlocked the way for investors to add a dash of commodities to their portfolios. And that is through one of the more unique actively managed ETFs out there.
Expenses run just 0.48%.
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.