ETF Spotlight: Actively Managed Funds By Tom Lydon

Actively managed exchange traded funds are beginning to make their mark in the $1.2 trillion ETF industry. Hybrid indices and equity-focused actively managed ETFs are hitting the market, after the success of the PIMCO Total Return ETF.

The active ETF universe is “heterogeneous,” says Morningstar ETF analyst Robert Goldsborough, though heavily skewed toward fixed income. “There are a lot of unique strategies, but not a lot of mainstream equity entries yet.”

It’s also still just a tiny sliver of the industry: Active ETFs have just under $7 billion altogether, Goldsborough says. Of the roughly 1,500 exchange-traded products available in the U.S., only about 50 are actively managed ET

About two-thirds of the actively managed ETFs focus on fixed income. The industry is finally taking shape in the equity market. Mike Hogan for Barron’s reports that providers are starting to introduce sophisticated indices that mimic the decisions a manager would make when buying and selling securities, in an effort to gain market share in active management.

There is a plus side to the introduction of this new method. Since active ETFs are not regulated to use derivatives in the make-up, the hybrid indices are allowed to use options and swaps, giving the creators more choices. Plus, most of these products are tactical and narrower, rather than covering large swaths of the market. Managers can use them for asset allocation and for targeting niche corners of the market.

The actively managed ETF space still has plenty of room for growth, but there are regulatory hurdles, and a higher price tag that has anchored this segment of the market.

Tisha Guerrero contributed to this article.