There are tons of exchange-traded funds out there, and wading through all of them can be a challenge because so many of them are alike. However, there is a class of ETFs that are either actively managed, or what I call “quasi-actively managed.”
The former explains itself. The latter is a bit tricky. I consider an ETF to be “quasi-actively managed” if the managers take a group of stocks and narrow them down based on a set of subjectively selected criteria.
When you look at these ETFs, you find that many of them do quite well and some outperform the overall market with less volatility, which translates to less risk.
That’s the strategy I use in my stock and option advisory newsletter, The Liberty Portfolio — look for securities designed to deliver a real rate of return that exceeds the true rate of inflation but with less risk than the market does.
Here are three actively managed ETFs that fit this category.
Actively Managed ETFs to Buy: iShares Edge MSCI Minimum Volatility Global ETF (ACWV)
Expense Ratio: 0.32%, or $32 annually per $10,000 invested
iShares Edge MSCI Minimum Volatility Global ETF (BATS:ACWV) takes a dual approach to investing in an index. First of all, the ETF aims to invest globally, including 55% of assets in the U.S., but spreads the rest out across Canada and other countries.
Then, it takes the stocks that had the lowest volatility over a given period and invests in those. The result is that it will capture less upside and less downside than the entire market would, or the benchmark, which in this case is the MSCI ACWI Ex-USA Index. From 2011 through Q3 2017, it captured 79% of the upside and only 49% of the downside. Thus it gets better returns with less risk.
In the past five years it has an average annual return of 11.3% with a standard deviation of 8, vs. the MSCI ACWI Ex-USA index benchmark, which only returned 6.8% with a standard deviation of 11.5.
Actively Managed ETFs to Buy: PowerShares S&P 500 Low Volatility Portfolio (SPLV)
Expense Ratio: 0.25%
The next choice has a very fine line of difference between its benchmark and what it does. The PowerShares S&P 500 Low Volatility Portfolio (NYSEARCA:SPLV) is the low volatility version of everyone’s favorite ETF, the SPDR S&P 500 ETF Trust (NYSEARCA:SPY).
It’s tough to look at SPY and not just want to plow all your money in it considering its incredible return last year and even the years before. Yet with SPLV, you are presented with a very real example of risk and return.
Let’s take the last three years. Over this period, the SPY averaged a return of 11% annually with a standard deviation of 10. That means the SPY has a 95% certainty of returning between -9% and 31% in any given year.
Over this period, the SPLV averaged a return of 10% annually with a standard deviation of 8.6. That means the SPY has a 95% certainty of returning between -7.2% and 27.2% in any given year.
Not terribly different.
But what if I said, over this same period, the SPLV will capture 72% of the upside of the SPY, but only 48% of the downside? I would much rather take the SPLV.
Actively Managed ETFs to Buy: AdvisorShares New Tech and Media ETF (FNG)
Finally, if you’d like to be more aggressive, consider the AdvisorShares New Tech and Media ETF (NYSEARCA:FNG). The top ten stocks in this fund are most of the FANG stocks, and account for 65% of the asset base, so you won’t be terribly diversified.
This is a very actively managed fund. According to its literature, “After a multifactor screening process, the final portfolio is determined by an investment committee. The committee meets at least weekly to identify the companies best positioned to provide disruptive innovation or participate in the new internet economy. Market leaders are given the highest weightings, with the remaining positions weighted based on their correlation to the market leaders.”
This is a brand new ETF, and so far, it is up about 10% since last July. Now, there is a lot of risk in playing these tech stocks, but I think management is going to get the hang of how to adjust allocation in the portfolio for maximum alpha.
Just be careful, because it carries a lot of risk.
Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance and is the Manager of The Liberty Portfolio at www.thelibertyportfolio.com. The Liberty Portfolio owns shares of ACWV. He has 23 years’ experience in the stock market, and has written more than 1,800 articles on investing. Lawrence Meyers can be reached at [email protected].