Though the year 2014 did not bring spectacular year-to-date (YTD) gains for the S&P (SPX), the benchmark index lately shook off all its deterrents and posted the strongest two-day gain in three years following the Fed’s more patient stance on the rate hike issue.

Overall, the year was moderate for the broader market indices with the S&P hitting all-time highs about 50 times, crossing the 2,000 mark for the first time but returning modest YTD gains of 13%.  Two other key indices Dow Jones Industrial Average and NASDAQ Composite lingered around 7% and 14% gains, respectively.

Investors should note that all gains were way short of last year’s monumental show, though in line with yearly gain averages for the most part.

While it becomes a little hard to scoop up profits from passively managed vanilla U.S. ETFs amid broader market troubles, a look at the YTD performance of the Active ETFs makes sense. Actively managed ETFs are on the rise these days as issuers are eagerly looking for ways to outperform the benchmark indices.

This corner of the ETF market still has a long way to go and is often overlooked by investors due to their illiquid nature and higher costs compared with passive funds. There are over 120 unleveraged active ETFs in the space with total AUM of nearly $17.5 billion.

Active funds are arguably expensive because of the research cost associated with the manager’s due diligence which increases the expense ratio. These also face more in expenses thanks to low trading volumes which add to the bid/ask spread. All these higher costs actually spoil the competitive positioning of the active ETFs in many cases.

Still, several actively-managed ETFs have breezed past the broader market indices this year. Below, we take a closer look at three actively managed ETFs that have beaten out their index-tracking counterparts in terms of year-to-date returns even when adjusting for expenses.

 

PowerShares China A-Share Portfolio (CHNA)

Though the Chinese economy has waned all through the year, China A-shares that track stocks listed on the Shanghai or Shenzhen exchanges delivered all-star performances. The credits go to the easing in A-Shares trading. The space was so far tightly held by and limited to domestic investors.

This is an actively managed ETF providing exposure to the China A-Share market using Singapore exchange FTSE China A50 Index futures contracts. The fund is an overlooked choice having generated only $3.5 million.
The option is illiquid with average daily volume of about 15,000 shares.  It charges 50 bps in fees per year from investors. CHNA is up 52% so far this year (read: Overlooked ETF Winners of China A-Shares Rally).

Active U.S. Real Estate Fund (PSR)

The fund looks to achieve alpha over the FTSE NAREIT All Equity REITs Index, with a focus on both capital and currency income growth. Real Estates were one of the major beneficiaries of the plunge in bond yields this year as the investments are known for their high-yield nature.

This fund has given an outstanding performance so far in 2014 and returned about 30%. Simon Property Group Inc (SPG), American Tower Corp (AMT) and Ventas Inc. (VTR) are the top three holdings of the fund. Industry-wide, Retail REITs takes the top spot with more than one-fifth of the exposure. The fund charges 80 bps a year in fees (read: 3 Actively Managed Bond ETFs for Stability and Income).

 

First Trust North American Energy Infrastructure Fund (EMLP)

Like real estate, MLPs too benefited from low bond yields as these are known for attractive income payouts along with solid growth potential and stable cash flows. Additionally, no production cut in the U.S. despite the recent oil rout continues to drive MLP firms higher. All these made EMLP a winner this year, which has added about 21.7% so far (as of December 22, 2014).

EMLP is an actively managed fund designed to provide exposure to securities headquartered in the U.S. and Canada and are engaged in the energy infrastructure sector (read: 3 ETFs Hitting All-time Highs in Rocky Market).

The ETF has amassed about $951 million in its asset base and trades in a moderate volume of roughly 350,000 shares a day. The fund charges a higher annual fee of 95 bps from investors.

From a sector look, more than half of the portfolio is allocated to pipelines while electric power companies round off the top two at 33%. The fund has a slight tilt toward large cap stocks with 51% share while mid and small caps take the remainder (read: 5 Best Performing Active ETFs).