The splash ETFs made when they hit the market in the 1990s
displaced a lot of mutual fund market share.
That is because investors have voted with their dollars for
exchange-traded funds’ tax-efficient structure, lower cost, transparency and
tradability.
Two decades into the ETF era, actively managed mutual funds,
which made up 95% of the market in 1998, now total just 76% of the fund market,
with ETFs now neck and neck with passively managed mutual funds, each holding a
12% market share, according to the Wall Street Journal.
Attempts to combine the advantages of active stock selection
with ETFs’ favorable structure continue apace through actively managed ETFs.
But progress has been slow, with active ETFs amounting to
little more than 5% of assets since the first active ETF launched
five years ago.
A key reason for the languid pace? ETFs’ vaunted
transparency.
Top active managers want to shield their portfolio
decision-making from copycats, something hard to do with ETFs, which reveal
trades daily, unlike mutual funds, which need not disclose their holdings more
than once a quarter.
A potential breakthrough may be at hand, however, as a small
startup with a big backer — Navigate Fund Solutions, a wholly owned subsidiary
of Eaton Vance — is shepherding what it calls exchange-traded managed funds
(ETMFs) through the SEC approval process.
“This is a way to deliver active strategies with better
performance and improved tax efficiency,” says Stephen Clarke in an interview
with ThinkAdvisor.
Clarke is trolling the halls of the Morningstar Investment
Conference to make the case that a better mousetrap exists for investors who
prefer actively managed funds.
If Clarke can convince the Securities and Exchange
Commission, financial advisors and retail investors of ETMFs’ virtues, then the
fund market may once again take on a different shape as it did with the advent
of ETFs.
The reason for ETMFs’ “better performance,” according to
Clarke, is that “the horse is carrying a lighter jockey.”
The portfolio depends entirely on the manager’s investment
selection, but “if you put the same portfolio in a mutual fund and an ETMF, the
ETMF ought to outperform the mutual fund based on its lower operating costs and
improved trading efficiency,” Clarke says.
What would this mean to advisors who prefer actively managed
mutual funds?
“I would estimate a difference of 50 basis points of annual
performance improvement,” Clarke says.
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