About a year ago we wrote about the prospects for actively managed ETFs.  Now a year later it seems like we may be on the cusp of more active ETF launches.  For instance, couple of days ago we discussed the disproportionate success of the PIMCO Enhanced Short Maturity Strategy Fund (MINT).  We agree with Michael Johnston at ETFdb that the success of this money market fund-alternative is likely to lead to a number of copycat funds.

Where does that leave the rest of the actively managed ETF industry?  At the moment, pretty much nowhere.  Christopher Condon at Bloomberg notes that active ETFs remain but a sliver of the ETF market.  The big fund companies seem to be waiting on some regulatory relief from the SEC to allow them to use a mechanism so they would not have to disclose their actual holdings on a daily basis.  So as to avoid the risk of front-running.

Assuming more actively managed ETFs come to market en masse, what should we expect performance-wise?  The evidence from actively managed open-end funds is not all encouraging.  Richard A. Ferri at Forbes highlights the results from the most recent S&P Persistence Scorecard.   Ferri writes:

A person would have to be a very bad coin flipper to get results that are worse than those shown in the S&P study. Over multiyear periods, few top managers are able to stay on top than one might expect with a random distribution.

These findings are consistent with recent research by Fama and French.  They find that there should be more funds that outperform than implied in the underlying data.  Rob Silverblatt at US News talked with Ken French about their findings:

[Silverblatt] So just how lucky are fund managers?

[French] If you look at the top 10 percent, they’re [comfortably] outperforming their benchmarks. …Those are the people that people would write books about. But it turns out that if you look at the distribution that you’d expect by chance, you’d expect more of them out there.

The bottom line from both of these studies is that past performance provides little information about future returns.  Logically, a low cost, indexed approach provides investors the best opportunity to generate net returns.  However, don’t expect this data to stop fund sponsors from pushing ahead with their active ETF plans. Why?  In part, because hope springs eternal.  But the big reason is fees.

In a world where a plain vanilla S&P 500 ETF is going to have a 0.06% expense ratio there is always going to be a desire for firms to up-sell investors into an active vehicle that can better justify a higher price.  Some actively managed ETFs will succeed, however most will likely fail over time to outperform a reasonable benchmark.  Just don’t expect to pick which fund is which before hand.