The biggest surge in new ETFs during the past 12 months has switched from ESG/Other thematic to actively managed ETFs. The preponderance of these new offerings and filings have come from major mutual fund houses and investment banks.

I’ve recently written an article that explains the many advantages of the more modern ETF structure. You can download it here:

Most actively managed equity ETFs do not have long enough histories to be covered by ValuEngine.An exception with an interesting story is DBLV, the AdvisorShares DoubleLine Value Equity ETF. Launching in 2009, Bethesda-based AdvisorShares is a true pioneer of actively managed equity ETFs.They reached out to active equity managers interested in using their exemptive relief and innovative platform. Through the years, active managers with very different strategies and fund structures have used the AdvisorShares platform with various degrees of success.  

This ETF has a unique history. It began its life as the AdvisorShares Wilshire Buyback ETF under a different ticker symbol. In October 2018, AdvisorShares Chairman Noah Hamman made a surprising announcement.DoubleLine, a very well-respected asset management company chaired by industry legend Jeffrey Gundlach, agreed to take over the management of the fund using a classic active value management approach. Accordingly, it selected the Russell 1000 Value Index as its benchmark. 

The fund was renamed and assigned the ticker symbol DBLV. It surprised many people that DoubleLine was willing to use two top managers to manage the fund using a fully transparent structure. This innovation was clearly ahead of its time.AdvisorShares materials consider the fund’s performance separately from when DoubeLine took over its asset management.

ValuEngine and ETF.com consider the entire history together.

This analysis utilizes DBLV as a case study of how this one actively managed value equity fund has performed relative to the iShares Russell 1000 Value, the largest ETF following the largest institutional Value Index benchmark. The chart below compares both in many categories.IWB, the iShares Russell 1000 Index ETF is provided for comparison. Please scroll to bottom of the article page to view the analytic table.

Observations:

1. DBLV has outperformed IWD, the iShares Russell Value 1000 ETF in all 4 of the historical periods measured. For the 3-year period, just about when DoubleLine took over management of the ETF, it outperformed by a 2.20% differential or 220 basis points per year using industry jargon
2. DBLV did so with almost identical volatility, also giving it a superior Sharpe Ratio,0.64 to 0.52.
3. Even in the combined or hybrid 5-year period using two years from the replaced management team, DBLV outperforms handily, 10.75% to 8.59%
4. In terms of multiples, DBLV lives up to its name as a value fund with a lower Price/Book and a substantially lower Price/Earnings ratio than its Value Index benchmark.  
5. DBLV’s dividend yield is about 25% higher than that of IWD, 2.1% as compared with 1.6%.
6. One question always asked about active management using an ETF structure was whether the higher expense ratio could be justified. For this case study period, the difference in fees between DBLV and IWD was 0.78% or 78 basis points. Since the annual outperformance was more than 220 basis points, the fee difference was more than justified in this case.

Therefore, from a performance perspective, the “level playing field” provided by the ETF structure helped DBLV outperform its benchmark ETF. This analyzes the past. Since timing is everything in the markets, what about now?

The consensus of strategists I’ve read this week, especially Rob Arnott of Research Affiliates, support the premise that the value cycle is in its early stages of outperforming growth. If so, DBLV appears to be a strong alternative to choose over IWD.  

According to the ValuEngine models, however, now is not the best time. DBLV gets out lowest rating of 1. In fact, less than 8 weeks getting 4 out of 5 from our model, IWD now ranks a below-average 2 out of 5. From late May to late July, our model has shifted negatively regarding value benchmark ETFs and value ETFs in general. Both DBLV and IWD are projected to have negative returns considerably worse than the negative returns projected for broad benchmark ETF IWB during the next 6 months. 

Market timing aside, the case study does provide support for the premise that using the ETF structure may give active managers a better chance of outperforming their benchmarks than the existing structure with all the disadvantages delineated in the research paper.

Please download it and share your thoughts with me.