ETFs are continuing to grow exponentially in the number of
offerings and assets under management.
Just last week, the U.S.-listed ETF market hit a new all-time
high of $1.762 trillion, and the total number of funds is nearing
With so many funds now in the mix, ETF providers are
continuing to introduce innovative active strategies to compete
with established passive indexes. While active management
typically leads to creative portfolios, it also paves the way for
higher fees to subsidize research, security selection and
It's natural to question whether or not paying a higher fee
for active management will truly result in better performance
over a passive benchmark. In some cases it certainly can
result in better total return, while in others you may be
throwing good money after bad.
Related: Europe ETFs Show Convincing
One of the most successful active ETF launches of the past
several years is the PIMCO Total Return ETF (NYSE:
). This core fixed income ETF has amassed over $3.3 billion
in a fund that charges 0.55 percent annually.
The best comparative benchmark for BOND is the iShares Core
U.S. Total Bond Market ETF (NYSE:
aggregate bond portfolio
charges a very modest 0.08 percent and has nearly $17 billion in
While BOND has an expense ratio nearly seven times greater
than AGG, it has been able to achieve a far superior track record
over the last two years. During that time frame, BOND has
gained 9.43 percent, while AGG has returned a lackluster 3.21
percent to shareholders.
Clearly in this instance, it has been worth paying the higher
fee for greater reward. However, that level of
outperformance does not translate to every actively managed
The AdvisorShares Equity Pro ETF (
) is a "fund of funds" strategy that rotates between global
sector ETFs to try and outperform the broader market. Over
the last two years, EPRO has been unable to keep pace with a
passive global index such as the iShares MSCI ACWI ETF (NASDAQ:
Over that period, EPRO returned 27.30 percent, while ACWI
gained 35.06 percent. EPRO also charges a net expense ratio
of 1.48 percent, while ACWI is listed at a more palatable 0.33
In this instance, the drag of higher management fees in EPRO,
coupled with a sub-optimal asset allocation mix, produced a less
It seems there are instances where actively-managed ETFs tend
to perform much better than their passively managed peers, and
other periods when the roles reverse. That being said, they
should continue to be on your guard and watched closely, as new
active strategies are introduced.
© 2014 Benzinga.com. Benzinga does not provide investment
advice. All rights reserved.
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