Turn on the TV to Bloomberg or CNBC, flip open a financial magazine or read a digital financial planning publication and they will all feature market gurus and pundits. Wall Street and Main Street love a stock- or bond-picking star. Many of these star managers have traditionally cut their teeth in active mutual funds.
But times are changing.
With the rise of active ETFs, the gurus are now turning their attention to the investment vehicle. Already, we’ve seen some high-profile ETFs’ launches of star managers. However, the real growth could be in the quarters ahead. For investors and the active ETF sector, star managers could push the vehicle into the stratosphere.
ETFs Take Center Stage
Mutual funds have long been the way most investors build their wealth. And active management has long been a part of the structure. In fact, until Vanguard and John Bogel launched the first index fund in the 1970s, active management was the only game in town. In active management, you’re essentially putting your trust and money in the hands of the principal of the fund. There are plenty of good managers out there, but some capture lightning in a bottle, aka better long-term returns.
We’re talking about the Gross’s, Gundlach’s, and Lynch’s of the world.
These fund managers rise to superstar status. Their funds grow large with assets as investors seek their market-beating returns. At the same time, various content producers and publications look at their opinions on the markets and investing.
Many investment shops have taken up the actively managed ETF mantle in earnest, thanks to their rapid growth, and started launching new active ETFs for their gurus.
Bill Gross and PIMCO made a splash back in 2012 with the launch of the PIMCO Active Bond, then known as the PIMCO Total Return ETF. More recently, several big-name investment shops—including DoubleLine, Fidelity, T. Rowe Price, and Blackrock—have started to launch funds specifically for their guru-focused investors.
Over the last year or so, we’ve seen PIMCO’s CIO, Dan Ivascyn, launch the PIMCO Multisector Bond Active ETF, DoubleLine’s Gundlach run two ETFs, David Giroux—who manages over $50 billion at T. Rowe Price—launch the T Rowe Price Capital Appreciation Equity ETF, and Blackrock hand over two new ETFs to Rick Rieder and Tony DeSpirito, CIOs of global fixed income and fundamental equities, respectively.
The ETF Structure Is Better
So why the flow of gurus into ETFs? Well, the structure may simply be better for active management than mutual funds.
For starters, ETFs are a better vehicle when it comes to taxes. Mutual funds are structured so that whatever happens within the fund is every investor’s responsibility. If a manager decides to sell a stock at a gain, everyone is on the hook for the capital gains taxes. Active management tends to have a lot more trading than passive funds. With ETFs, the creation/redemption mechanism and in-kind transfers allow investors to reduce their capital gains taxes. They only pay gains when they sell the ETF itself. This makes them more efficient to hold.
Second, the creation/redemption mechanism provides relief from so-called cash drag. One issue with mutual funds is that asset managers can’t be fully invested. They need to have a layer of cash in their funds to support investor redemptions or sales. If they don’t, they could be forced to sell assets before they want to. This cash drag can hurt returns. With an ETF, a manager can be 100% fully invested, eliminating cash drag and providing better returns.
We can’t forget about costs either. ETFs are simply cheaper to run and own than mutual funds. As such, their fees and the fee hurdle, which active managers must jump over, are less. The average active ETF had an annual expense ratio of 0.57%. This compares to 0.70% for the average active mutual fund. 1
Finally, managers now have ways to hide their secret recipes. The allowance of semi-transparent structures allows managers to only release their holdings data quarterly like mutual funds. This eliminates front running and copycat investing. When combined with tax savings, the elimination of cash drag, and overall lower costs to run an ETF, active makes sense in an ETF.
Just Getting Started
The success and multi-billion in assets under management of Cathie Wood’s ARK Innovation ETF is proof that investors are willing to follow gurus and superstar managers into the ETF structure. With that, more top names in the investment world will most likely take the plunge and launch active ETFs in the coming years. This could provide the boost active ETFs need to overtake mutual funds and grow in size.
The question is whether or not investors should participate.
There are many cautionary tales of former superstar managers who have crashed to earth. Ken Heebner at CGM Funds and Bill Miller at Legg Mason come to mind. Even Wood’s performance at ARKK has been spotty.
Ultimately, guru- and superstar-managed ETFs are only as good as their managers. Investors need to dig in and do their own due diligence before pulling the trigger. And they probably shouldn’t put all their eggs in one basket.
Top-Performing Guru-Managed Active ETFs
These funds are selected based on YTD total return. They have expense ratios between 0.5% to 0.75% and have AUM of $190mn to $8bn. They have a dividend yield between 0% and 5%.
| Ticker | Name | AUM | YTD Total Ret (%) | Yield | Exp Ratio | Security Type | Actively Managed? |
|---|---|---|---|---|---|---|---|
| ARKK | ARK Innovation ETF | $7.93B | 35.6% | 0% | 0.75% | ETF | Yes |
| BOND | PIMCO Active Bond Exchange-Traded Fund | $3.676B | 1.7% | 4.4% | 0.56% | ETF | Yes |
| DBND | DoubleLine Opportunistic Bond ETF | $193M | 1.5% | 4.8% | 0.5% | ETF | Yes |
Recently Launched Guru-Managed Active ETFs
These funds are selected based on 3-month (3M) total return as of August 31, 2023. They have expense ratios between 0.31% to 0.55% and have AUM of $6mn to $150mn. Their dividend yield ranges between 0% and 5%. Note that for TCAF, the starting date for return calculation is June 14, 2023 – its inception date.
| Ticker | Name | AUM | 3M Total Ret (%) | Yield | Exp Ratio | Security Type | Actively Managed? |
|---|---|---|---|---|---|---|---|
| BLCV | BlackRock Large Cap Value ETF | $6.3M | 8.48% | 0% | 0.55% | ETF | Yes |
| TCAF | T Rowe Price Capital Appreciation Equity ETF | $193.3M | 3.8% | 0% | 0.31% | ETF | Yes |
| BINC | BlackRock Flexible Income ETF | $146.8M | 1.96% | 4% | 0.50% | ETF | Yes |
| DMBS | DoubleLine Mortgage ETF | $99.9M | -1.24% | 4.5% | 0.49% | ETF | Yes |
The Bottom Line
Mutual funds were long the vehicle for active managers to strut their stuff. But thanks to the rise of active ETFs, change is coming. After several high-profile launches from high-profile gurus, active ETFs are becoming the vehicle of choice for active management. In the end, that will provide plenty of growth for the industry.
1 WSJ (June 2023). Active vs. Passive ETFs: How They Stack Up