Inside Actively Managed Equity ETFs - A Topic Of Increasing Importance

Actively managed ETFs have evolved very differently from index-driven ETFs. Most of the assets have been accumulated in actively managed fixed income ETFs while the vast preponderance of Assets Under Management in Equity ETFs are index driven. Although there are many legacy reasons for this, the fact is that the efficiencies of the ETF structure, tax and operational, benefit fund shareholders of actively managed funds even more than the benefits long realized by those holding index-driven ETFs. I wrote in article in (then the Journal of Indexes) in 2002 about these benefits. They still apply today. I am happy to send a copy to anyone who is interested.

Perhaps the most overlooked benefit that pertains especially to active managers is that the structure insulates them from daily cash flows and cash drag. This fact means that all their trades can be based solely on investment decisions, not the need to liquidate a position. Often a manager forced to sell will choose a fresher idea with no capital gain over a stale idea with a significant embedded capital gain. This forced choice typically works against alpha.  The need to keep cash available for redemptions can result in cash drag in an up market.  Combined with all the well-known advantages, I believe an actively managed fund that switched to the ETF structure levels the playing field with passive benchmark ETFs.

Today’s analysis covers seven actively managed ETFs:  

AIEQ, AI Powered Equity ETF by ETF Managers Group

ARKK, ARK Innovation ETF

ARKW, ARK Next Generation Internet ETF

CWS, Advisor Shares Focused Equity ETF

DYNF, BlackRock U.S. Equity Factor Rotation ETF

FTHI, First Trust Buy/Write Income ETF

HUSV, Horizons Low Volatility ETF

AIEQ seeks long-term capital appreciation within risk constraints commensurate with broad market US equity indices. The fund applies proprietary analytical algorithms to artificial intelligence (AI) technology, which can process over one million pieces of information per day, to build predictive financial models on approximately 6,000 U.S. companies. The technology continually analyzes data and models in its active stock selection process, and derives an optimal risk adjusted portfolio consisting of companies with high opportunities for capital appreciation. The fund is actively managed and discloses all portfolio holdings daily.

ARKK is an actively managed Exchange Traded Fund (ETF) that seeks long-term growth of capital. It seeks to achieve this investment objective by investing in domestic and foreign equity securities of companies that are relevant to ARKK’s investment theme of disruptive innovation. ARK defines ‘‘disruptive innovation’’ as the introduction of a technologically enabled new product or service that potentially changes the way the world works.

ARKW is an actively managed ETF that seeks long-term growth of capital by investing under normal circumstances primarily (at least 80% of its assets) in domestic and U.S. exchange traded foreign equity securities of companies that are relevant to the Fund’s investment theme of next generation internet.  The Adviser believes companies within this ETF are focused on shifting technology infrastructure to the cloud, enabling mobile, internet-based products and services, new payment methods, big data, artificial intelligence, the internet of things, and social media.

CWS invests in fundamentally sound companies that have shown consistency in their financial results and demonstrated high earnings quality. The investment strategy has been employed by the portfolio strategist, Eddy Elfenbein, since 2006 and is published annually as the Crossing Wall Street “Buy List.” As a focused portfolio, CWS will typically look very different than a traditional benchmark like the S&P 500. CWS can be used in a portfolio to add a fundamental alpha seeking manager in your domestic equity allocation.

DYNF seeks to outperform the investment results of the large- and mid-capitalization U.S. equity markets by providing diversified and tactical exposure to style factors via a factor rotation model. The fund selects stocks based on rewarded factors: quality; value; size; low volatility; and momentum. BlackRock’s active management team dynamically emphasizes investment styles based on forward-looking insights.

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