Yet the transparency of ETF holdings can be a double-edged sword. The downside of the daily disclosures is that savvy investors will see what shares active ETF managers are acquiring, and then buy these same stocks, increasing prices that managers must pay as they continue to accumulate shares.
Active ETFs managers like Eaton Vance are exploring ways to limit this transparency so managers can build up large blocks of ETFs without telegraphing their strategies to the market. Even if these efforts don't succeed, active ETFs would still likely have more transparency than mutual funds.
Unlike most mutual funds, ETFs do not necessarily trade at the total value of their underlying holdings. Instead, the market price of an ETF is determined by the forces of supply and demand. So ETF shares sometimes trade at prices above or below the value of their holdings. This may pose a problem for investors in less-liquid ETFs if they want to dump them in a sell-off.
Investment companies that offer active ETFs include those that have suffered damage from the flight of cash out of mutual funds and into regular, passive EFTs. These companies are seeking to capitalize on their investment management skills while capturing ETF market share.
Examples of ETFs on the market include:
• WisdomTree's Japan Hedged Equity ETF (DXJ) offers investors the opportunity to invest in Japan while providing a hedge against the yen.
• PIMCO's Total Return (BOND), an actively managed bond ETF that seeks performance correlated with Barclays Capital Aggregate Index.
• Advisorshares' recently launched Pring Turner Business Cycle ETF (DBIZ), managed by PringTurner Capital Management, uses the firm's unique investing process, geared to different stages of the business cycle. This has appeal for investors who believe that, like the last decade, this one will be one of low average annual returns.
• A variety of active ETFs from State Street Global Advisors, including SSga Income Allocation ETF, a total return fund focused on investment in income and yield-generating assets such as corporate bonds, dividends and preferred stocks.
Little did many investors know 20 years ago that the then-fledgling ETF industry would become what it is today. Expect to see a wave of active managers enter the ETF arena over the next few years as the industry comes up with innovative solutions to the disclosure requirements that sometimes bedevil their strategy execution. In 10 years, active ETFs might be as popular as the passive form is today.
This work is the opinion of the columnist and in no way reflects the opinion of ABC News.
Craig J. Coletta has 20 years of experience in the financial industry. He is president of C.J. Coletta & Co., a Registered Investment Advisor firm, and president of Coletta Investment Research Inc. Coletta is a Chartered Financial Analyst charterholder, a Chartered Market Technician and a Certified Hedge Fund Professional. He holds a B.S. in accounting and business administration from Rider University, and is a member of the American Institute of Certified Public Accountants.