Up until last year, people using words such as “nascent” and “pre-mature” to describe the actively-managed ETF market in the United States would have been justified in doing so. The sector attracted little attention from issuers until recently, as well as little in the way of investor assets and interest. While the assets within Active ETFs have ballooned to approximately $273 million as of March 1, 2010, the real change has been the amount of interest the space as attracted. Recent weeks have seen the floodgates open in terms of the number of new filings for Active ETFs. Major financial players like JP Morgan (JPM) and mutual fund behemoths Legg Mason (LM) and Eaton Vance have declared their intent to launch actively-managed ETFs. Such moves warrant a re-assessment of the current Active ETF market, who the major players are and how they will be affected by these new entrants.
Early Leaders (Click chart to enlarge)
The above charts show the break-up of market share in the Active ETF space by market capitalization and by the number of products listed on the market. PIMCO is clearly the market leader at the moment, despite the fact that they only have 3 listed Active ETFs. In fact, of those 3 products, PIMCO’s Enhanced Short Maturity ETF (MINT) accounts for more than 80% of the $167 million in total assets being managed by PIMCO in Active ETFs. PIMCO’s success goes to illustrate how fixed-income actively-managed ETFs have turned out to be more popular than their equity counterparts.
PowerShares, which was the first to enter the space, still has only managed a 16% share through its 5 offerings, despite being on the market since April 2008. Their strategies have not attracted much attention and PowerShares has not announced plans for any new launches since 2008. Both Grail Advisors and AdvisorShares have positioned themselves as platforms for relatively small active managers to launch actively-managed ETFs and have had some success doing so, with each holding a 9% share. AdvisorShares came out with the Dent Tactical ETF (DENT), managed by Harry Dent, which stands as the 2nd largest Active ETF in the US. AdvisorShares made it clear that they will look to bring more unconventional and unique strategies to market and are on track to do so, announcing the launch of 2 new products in April alongside a partnership with Peritus Asset Management. Grail Advisors, taking a different approach, already has 7 products on the market. Most of them are conventional equity and fixed income strategies that they hope investors will catch onto once interest builds in actively-managed ETFs. Finally, iShares threw its hat into the ring with its Diversified Alternative Trust (ALT), the only strategy in the US investing across asset classes that makes use of hedge fund-style strategies.
The Active ETF Players Holding The Aces
Amongst those currently in the Active ETF space and those planning to enter it, the players can be split up into several categories:
1. Traditional providers of Index ETFs: PowerShares, BlackRock iShares, US Commodity Funds, Claymore Advisors
2. Launch platforms for “sub-advisors”: Grail Advisors, AdvisorShares
3. Mutual fund companies entering the ETF space: PIMCO, Legg Mason, T. Rowe Price, Eaton Vance, John Hancock, Putnam Investments, Vanguard, Charles Schwab
4. Major Banks: JP Morgan, Goldman Sachs (GS)
While the categorization is overlapping for some companies like Vanguard and Charles Schwab who provide both ETFs and mutual funds, the distinction gives an idea of the players’ current capabilities and deficiencies:
1. Traditional providers of Index ETFs
These issuers, such as PowerShares and iShares, will have the advantage of having the most experience with the ETF industry. They understand the dynamics of the marketplace and have the distribution channels necessary to get ETFs into the hands of investors who are looking for them. However, these players have traditionally stuck to indexing strategies and moving into active management is a step away from what they are used to. Without any in-house active management expertise, these companies will have to scout out and make use of external sub-advisors which could result in a longer time-to-market and higher expenses. The one player in this group with a real ace in their pocket is BlackRock iShares. With the active management expertise of BlackRock and immense experience in the ETF industry coming from iShares, the combined company does have the potential to roll over the competition. In the long run, this group of players is likely going to make up one half of the Active ETF market.
2. Launch platforms for “sub-advisors”
Companies such as AdvisorShares and Grail Advisors operate on a business model that recognizes the inability of small to medium-sized active managers to enter the ETF industry on their own due to a lack of resources or understanding of the ETF space. As such they provide the platform necessary for these managers to offer their strategies to a larger audience through Active ETFs. They will likely continue to operate in that niche because larger managers like PIMCO have the ability to launch their own products. Success of their offerings will largely depend on the ability of their sub-advisors to outperform and earn a strong track record. A challenge for players such as Grail and AdvisorShares will be establishing brand reputation and trust in their new products and managers.
3. Mutual fund companies breaking into ETFs
Mutual fund companies have for many years seen ETFs eat up their market share. In fact, in 2009, Index ETFs finally had a larger market share than index mutual funds amongst passively-managed strategies. Large mutual fund managers have tried to enter the ETF industry to recoup some market share but their expertise has been active management and not indexing strategies. The arrival of actively-managed ETFs has finally created a situation that allows these large players to penetrate the ETF market with their own strategies. The advantage for this group of players is that they already have an established presence in actively-managed strategies with a long track record and recognizable brand names created through their mutual funds. Also, they have strong networks in place with financial advisors and other distribution channels that can be used to push active strategies to investors. The difficulty for them will be dealing with the peculiarities of the ETF market. I see this group of companies going into direct competition with each other just as they currently compete in the mutual fund space. A case in point is Eaton Vance, which filed to launch five Active ETFs that are identical to PIMCO’s five products in a bid to attack PIMCO’s hold on fixed-income Active ETFs. These mutual fund companies are likely going to take up the other half of the Active ETF industry.
4. Major Banks
Very few banks currently provide any ETF products, with JP Morgan having one listed ETF and UBS (UBS) having a couple. Banks entering into this arena will definitely have to feel their way around the ETF industry. Not only that, without any expertise in traditional active management they will likely have to rely on external sub-advisors to provide portfolio management services. The only advantage they will have is a recognizable brand name and presence in the financial industry in general. In my opinion, the banks have entered the Active ETF space in an attempt to keep up with one of the fastest growing investment products. But without any overlap of existing expertise with their current business, it is likely they’ll be left to play catch up with the other players in the Active ETF space charging ahead.
Disclosure: No positions in above-mentioned names.
No comments:
Post a Comment