Actively managed exchanged-traded funds have grabbed lots of attention, if few assets, since they first hit the market a few years ago. But investing experts say one product may finally deliver some customers -- actively managed bond ETFs.
Investors this year have been piling into active bond ETFs -- fixed income funds that trade on an exchange all day like a stock, but with holdings selected by a pro. Through May, these funds have drawn inflows of $755 million, 33% more than all other actively managed ETFs combined, according to fund tracker Morningstar. And while such funds still account for only a sliver of the $1 trillion ETF industry, they currently make up more than half (and growing) of the $4.3 billion active ETF business.
Eager to get a piece of the action, fund providers are rushing to launch new active bond ETFs. The number of funds is expected to double, to 20, in the coming months. Guggenheim Funds just launched two funds, Eaton Vance recently received regulatory approval to introduce up to five new active bond ETFs and BlackRock also recently got the green light to enter the active market. Meanwhile, Pimco has announced plans to create an ETF version of its popular $240 billion Total Return Bond fund
Fans of these active bond ETFs say they give investors access to professional money managers for a relatively low price -- a proposition they say is looking better as the bond market becomes scarier to navigate on one's own. But critics point out that these funds haven't proven they can outperform bond mutual funds or even regular bond ETFs. "One of the things people look at is 'how well these funds have done in the past?'" says Tom Graves, an equity analyst for Standard & Poor's. "But there's not much history to some of these."
And while fees on active bond ETFs are generally lower than mutual funds -- the average expense ratio for these ETFs is 0.52%, half what the typical actively managed bond mutual fund charges since ETFs trade like stocks, commissions can really add up for heavy traders, says Don Suskind, head of ETF product management team for Pimco. Another consideration: Because the bond market is less liquid than the stock market, the prices of all bond ETFs aren't necessarily true to their underlying value. That essentially leaves investors open to paying too much or selling for too little, says Timothy Strauts, an ETF analyst for Morningstar.
Still, for fund companies, actively managed bond ETFs solve a problem that, they say, has kept them from fully embracing the funds' equity analogue. ETF managers are required by law to disclose their holdings on a daily basis, and fund companies worry that it's too easy for other investors to mimic a stock ETF manager's strategy or that investors could encourage investors try to jump into certain stocks before a manager fully builds a position, says Hougan. While it's still possible for investors to mimic bond fund managers, the risk of front running is smaller with bond funds, which hold more securities and smaller positions than stock funds, says Strauts.
For interested investors, analysts recommend larger active bond ETFs, which are less likely to have pricing problems. Graves likes the $875 million WisdomTree Emerging Markets Local Debt fund (ELD),
As an alternative to low-yielding money funds, Strauts recommends the $1 billion Pimco Enhanced Short Maturity Strategy ETF (MINT)