On the inevitability of actively managed ETFs
- March 8th, 2012
At this point no one should really be all that surprised that the ETF industry is pushing headlong into active ETFs. As we discuss in our forthcoming book it is simply a logical extension of the business model. Not long after the introduction of the S&P 500 Trust ($SPY) the industry has pushed into additional asset classes and strategies that presumably justify higher management fees. Actively managed ETFs are therefore the latest in a long line of industry “innovations.”
One need only look at the price war going on between the big three ETF providers to see why firms would want to transition their business models from low cost, indexed products to higher fee, actively managed products. Ajay Makan in the FT notes:
BlackRock, Vanguard and State Street, which collectively manage 84 per cent of the $1.2tn in assets in exchanged-traded products, have cut fees on 75 funds so far this year, while raising fees on just two, according to XTF, a data provider…
Fees for the products have been on a downward trend for several years, as more sponsors launch funds, but this year’s price cuts have been striking. By comparison, there were only 94 fee cuts across the entire industry in 2011, according to XTF, and in 2010 there were two fee increases for every five cuts.
Makan notes how the presence of Vanguard in the ETF arena has caused downward pressure on all providers. Many analysts have looked at the launch of the actively managed Pimco Total Return ETF ($TRXT) as a watershed moment for the industry. It now seems that the fund has been successful in garnering assets right out of the gate. Brendan Conway at Barron’s has already gathered some $134 million in assets in its first week of existence.
The rest of the money management business is on notice. Just in the past week two more firms, Van Eck and now Charles Schwab, have filed with the SEC to launch their own actively managed ETFs. They are not the first and will not be the last, either.
Willie Sutton reportedly said when asked why he robbed banks, “because that is where the money is.” While this story is an urban legend, it resonates to this day. If you are wondering why the fund industry is pushing into active ETF, you need only remember these previous apocryphal words.
Why is the fund industry hot on active ETFs? Because that is where the higher fees are. You can argue whether this is an altogether welcome development for investors. What you can’t argue against is the desire of the industry to prod investors into vehicles that provide much higher fees than those found on plain vanilla index ETFs on which we continue to see downward pressure. One of the great benefits of the ETF revolution has been that investors can now more easily keep more of what they make. Active ETFs are a step away from this trend.
Items mentioned above:
Why ETFs are the future of active management. (Abnormal Returns)
A price war is brewing in the land of ETFs. (FT)
Pimco Total Return ETF assets already at nine figures. (Focus on Funds)
Van Eck seeks to copy Vanguard ETF design. (IndexUniverse)
Schwab seeks to offer active ETFs. (IndexUniverse)
Willie Sutton entry. (Wikipedia)
Keep more of what you make. (Abnormal Returns)
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