Actively managed ETFs poised to challenge mutual funds

Atkinson pointed to a recent report by McKinsey & Company which predicted that actively managed ETFs could, within a decade, reach 10% of all active U.S. mutual fund assets, or more than US$1 trillion in assets. Currently, actively managed ETFs in the U.S. hold less than US$5 billion in assets.

“Active ETFs are just starting out,” he said. “We’ve seen this happen with index ETFs, and now we’re going to see it with the active side.”

Added Atkinson: “When it happens, it’s going to happen fast.”

Indeed, there are currently about 800 filings for actively managed ETFs in the U.S., Atkinson said.

A variety of different factors are fuelling the growth of ETF assets around the world, such as the shift towards fee-based advice models and a greater sensitivity to fees by investors, Atkinson said.

“There’s a lot of trends in the world that are helping ETFs,” he said.

Given that Canadian investors rely heavily on advice, the extent to which they embrace ETFs will depend largely on whether more advisors recommend the vehicles, said Yves Rebetez, managing director and editor of the website ETFinsight (www.etfinsight.ca). He expects advisors to begin embracing and promoting the products in far greater numbers.

“The more people get educated, the more advisors look under the hoods of mutual funds and ETFs, the more I think they’ll migrate towards ETFs as being the superior solution,” said Rebetez, noting that the funds boast cost and tax advantages. “An ETF, as an envelope, is just a superior delivery mechanism.”

For fee-sensitive clients, actively managed ETFs are highly appealing when compared to mutual funds, Atkinson said. He pointed out that the management fees associated with an actively managed ETF are between one-third and one-half the fees associated with a mutual fund.

“The cost is obviously the big issue,” he said.

As demand rises, more asset management companies are entering the ETF space – including firms that already offer mutual funds. California-based Pacific Investment Management Co., for example, has gathered US$540 million in assets in its Total Return Exchange-Traded Fund (NYSE:BOND) – an ETF version of one of its popular fixed income mutual funds.

“Why are these firms bringing ETFs when they already have mutual funds? They obviously see it as an alternative form of distribution,” Atkinson said.

Rebetez said asset managers are recognizing the importance of having a presence in the ETF space in order to avoid losing assets to other providers.

“[They] see ETFs as an investment tool of the present and the future, and [they] want to be there to deliver it to clients that choose to use that delivery mechanism, because [they] don’t want to be left out,” he said.

To address advisors’ concerns about compensation when utilizing ETFs, Atkinson said some Canadian ETF providers have introduced advisor-series funds that provide advisors with commissions – typically 50 basis points for fixed income funds and 75 basis points for equity funds. These series of ETFs have attracted more than $1 billion in assets in Canada.