The house view at Swiss & Global, a member of the GAM group, is that most passive ETFs which simply track indices give too much weighting to components that are unattractive and so do not offer investors good returns.
Stefan Angele, head of investment management at the company said, for example, that the eurobond index gives a large weighting to Italy because of its high levels of debt and, as investors have seen in recent weeks, this does not necessarily present an attractive investment proposition.
Angele also pointed out that until approximately six months ago, Greece was a component in the same index, even though it was clearly in a dreadful position with its public finances.
Swiss & Global’s new range of ETFs are still in what it termed a “developmental stage” and is subject to regulatory approval, so it is unclear exactly how they will work.
But the company’s foray into actively-managed ETFs has come as a surprise to many in the industry.
Too late for active ETFs?
Peter Sleep, portfolio manager at 7im, said: “There are not many of them [active ETFs] around. In my opinion it is probably an expensive way of doing it because you’ve got to pay an extra 10bps to 30bps for the extra liquidity.”
He said he has seen examples of directly comparable products, one within and one without an ETF wrapper, and the fees for the ETF were 30bps higher. The investor is paying for the intra-day liquidity of the ETF, but in most cases this is unlikely to present a huge advantage, Sleep added, since most mutual funds will trade once a day anyway.
Caroline Shaw, fund manager at Courtiers, said the timing of Swiss & Global’s active range could prove interesting because the implementation of RDR is already having an impact on the fees mutual funds charge.
“The AMC on a mutual fund used to be 1.5% with trail commission. Without the trail commission (post-RDR) and without the platform fee that will come down to 75bps in many cases, and some passive emerging market ETFs charge 75bps. It’s seems almost a bit too late to get into the active ETF space.”
Currently active ETFs represent only $5bn of a $1trn-plus ETF industry, according to ETF Trends. There are approximately 40 active ETFs trading now in the US, but only a handful of them have significant assets under management.
Pimco is the biggest provider to have moved into this space and its actively-managed Pimco Enhanced Short Maturity Strategy ETF has $1bn under management.
iShares, db X-trackers and Lyxor have all looked into the possibility of launching such products, but there is a sense providers are waiting to see whether the trend will take off in the same way passive ETFs did.
Waiting on the sidelines
According to one source, there are over 400 actively managed ETFs registered with the Securities and Exchange Commission in the US, with a view to “getting the issue out the door when the time is right”.
Some providers have launched products that have flirted with the actively-managed label and these tend to have indices that are in some way altered to try and maximise returns.
Pimco and Source have come together to launch an emerging market bond ETF, which they term "smart-passive", with an index compiled to reflect the countries’ GDP and their capacity to service their debt.
Shaw said: “The definition of actively managed is not yet clear and an actively managed index would probably count as an active ETF. That would then seem to be a more efficient way for providers to do it – putting their sources into actively managing the index, with the actual ETF only tracking that index.”
But she added that the ETF space in Europe was already dealing with a lot of issues, to do with structure and counterparty risk, and questioned whether it could handle another new concept thrown into the mix.
She also pointed out that the current offering of active ETFs were bond-based products and was unsure how an equity-based ETF could have an active slant without amassing considerable fees.
As with other ETF trends, it is likely the US market will lead the charge (if one ever develops), but as one of the first to enter this space in Europe, Swiss & Global could well be among the trendsetters.
