There are more exchange-traded funds (ETFs) listed in the U.S. than single companies. While Active ETFs are not new, we are seeing more and more managers come to the ETF party.
With interest rising to the highest levels in decades, active fixed-income strategies are amongst the fastest growing areas. Smart index strategies and thematic exposures are clearly the future where style can command higher MERs for the issuers.
Do we really need another S&P 500 exposure. You can’t beat the VOO with an MER at three basis points to track the largest benchmark in the world or VTI and VT (six basis points) to track the entire U.S. or world market.
Cost, really, no longer matters much with those MERs. There are even some ETFs that pay you (negative management fees) for the first year to raise assets while they get going.
The profitability of the ETFs for the manager is in alternative (hedge fund like), thematic or active strategies that can beat a low-cost, index-like return.
Single stock covered call and leveraged ETFs are growing fast too. Why? Because the management fees are still attractive and investors are willing to pay higher fees for tax benefits and other styles that they can’t do on their own.
A new leveraged ETF (URSP) looks to capitalize on avoiding the index concentration in the traditional cap weighted indexes noted above. The equal weight S&P 500 ETF (RSP) has been around for years and is at 20 basis points.
The new 2X leveraged ETF comes at 95 basis points. If a person was using margin in their cash account to trade them for longer periods of time, it makes more sense to use the ETF versus the annual cost of margin that could run much higher.
It also opens up the use of leverage in registered accounts that is not available.
URSP (95bps) vs. RSP (20bps)
The growth of the active versus passive fixed-income side in the chart tells the story; we can see the growth in recent years as interest rates have moved higher. Rising rates are bad for fixed-income investors, so an active approach would benefit versus a passive index.
And as inflation becomes a factor that bond investors have not had to worry much about in recent decades, it will likely be a factor in an era of less globalization.
On the equity side, the theme is even more dramatic. A big driver of the move to active is the simple fact that the fees on passive ETFs are hitting a floor.
For those in the Greater Toronto Area, I’ll be giving an opening keynote at the Money Show this Friday.
Come out and hear about some of the lessons learned over the past 40 years of investing and some of our ideas for your portfolio going forward.
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