Active, Passive ETF Shops Get Active
February 15, 2013
Yes, mutual funds have been outshining exchange-traded funds, so far this year. The traditional funds pulled in $79.1 billion all told, with half that in stock funds. Exchange-traded funds pulled in $28.6 billion, according to Morningstar, with about $20 billion of that in stock funds.
Yet, last week was a busy week for both active and passive exchange-traded fund providers. There were five announced fund launches and one updated filing of an actively managed fund from a mutual fund stalwart.
On the active ETF front, Pimco headlined the week with the launch of the PIMCO Foreign Currency Strategy Exchange Traded Fund (FORX), which will bet on fundamental changes in global currency markets.
The fund will be jointly managed by Scott Mather, managing director and head of global portfolio management; Vineer Bhansali, managing director and head of quantitative investment portfolios; and Thomas Kressin, senior vice president and head of European foreign exchange. Its total net annual operating expense is 65 basis points.
"The ongoing transition away from the dollar as the preeminent global reserve currency is continuing and many competing currencies increasingly offer better yields and long-term credit dynamics," stated Mather.
"FORX is a purer way to gain foreign currency exposure and also avoids the unwanted exposures that can come with holding indirect currency plays such as equities or commodities," he said.
First Trust Advisors last week also launched an actively managed exchange-traded fund, dubbed the First Trust Preferred Securities and Income ETF (FPE) to bet on preferred securities and income-producing debt securities, including corporate bonds, high-yield securities and convertible securities.
The ETF will be subadvised by Stonebridge Advisors, a Wilton, CT, Registered Investment Advisor. The fund sports an expense ratio of 85 basis points.
Ryan Issakainen, its senior vice president and ETF strategist, said while the firm would've preferred the fund to launch a year ago, it currently sees opportunities for preferred securities because investors are looking for ways to generate income.
"We felt it made sense to bring a fund like this that's actively managed because in this environment, you can add value by having the ability to selectively manage your credit exposure and as interest rates are expected to remain low, we recognize that at some point rates will move higher," he said. "And being actively managed, we have the ability to manage interest rate risks" should the Fed start raising rates.
Issakanien added that the firm currently has a mutual fund version of the ETF also managed by Stonebridge but said he isn't worried about the new ETF potentially cannibalizing the mutual fund or vice versa. "We want to provide options for investors and advisors in either case," he said.
Next up for First Trust? A long/short fund focusing on high yield debt fund, which was filed by the firm last October. The ETF may short U.S. Treasury and corporate debt securities and use the proceeds to purchase high-yield debt. It will be managed in-house by the firm's leveraged finance team.
"Our outlook is providing added value in-house in spaces where it makes sense," said Issakanien.
While it didn't officially launch its maiden active ETF, Franklin Templeton Investments took another step last week in launching its Franklin Short Duration Government ETF. According to its latest regulatory filing, the fund will bet on mortgage-backed securities including adjustable rate mortgage securities as well as Treasury bonds. The portfolio managers for the new offering are Roger Bayston and Patrick Klein.
The firm initially filed with regulator to launch the ETF in June 2012.
A spokesman for the firm was not immediately available to comment on its initial active ETF effort.
On the passive side, Market Vectors unveiled its Market Vectors BDC Income ETF (BIZD), to bet on business development companies, which generate high return through loan and debt investments in private U.S. companies that are below investment grade or not rated. BIZD tracks the Market Vectors US Business Development Companies Index, which tracks the overall performance of publicly traded BDCs with market capitalizations of at least $150 million.
Brandon Rakszawski, product manager for Market Vectors ETFs, said the firm sees a huge demand for income in the marketplace. "These securities are equities with high yield so it's an equity income-focused product and we feel there's demand for equity income in the market as investors potentially rotate out of bonds and fixed income," said Rakszawski.
"We will be the only ETF that offers pure play exposure to BDCs," he said. "There are ETFs out there that focus on private equity funds, which may hold BDCs but they're also focused on different (private equity) investments. It's a relatively untapped space and we're happy to bring the first ETF to solely focus on BDCs."