The vast majority of the more than $1.2 trillion in ETF
assets are in passive, indexed strategies. But that hasn't
deterred AdvisorShares Chief Executive Officer Noah Hamman from
leading the charge to define a more active future in the world of
exchange-traded funds. His firm helps active managers bring their
strategies to market in ETF wrappers, and his biggest fund, the
AdvisorShares Active Bear ETF (NYSEArca:HDGE), has $326 million
in assets, or just over half of all the assets to his firm's
In an interview with IndexUniverse Correspondent Cinthia
Murphy, Hamman acknowledged that market development for active
ETFs has so far been a tough row to hoe, but said the same was
true for index ETFs in the early years. He argued that most
mutual fund assets remain in active strategies, and because
investors want alpha, a lot of those assets stand a decent chance
of migrating into active ETFs.
:I have been told recently that the next wave of growth in the ETF
industry will not come as much from 401(k)s as from a boom in
actively managed strategies. I assume you would be in that camp,
:The majority of investor assets in equities mutual funds-something
like 80 percent, last time I checked-is tied to actively managed
strategies. It's a really big number. It's investors voting with
their dollars to say they want active management. So we look at
that and we see the potential. But it's a slow process to tap into
:For an active ETF provider like AdvisorShares, then, the
competition is mutual funds rather than index-fund firms?
:I often get that question:'How are you going to compete with
iShares, PowerShares, SSgA?' And I always answer it the same way:We
are not competing against those guys. We are competing with
actively managed mutual funds.
:So an active ETF should not be seen as a replacement for a passive
strategy, but rather a complement to it in an overall
:Investors really need a balance between asset class
diversification and manager diversification. You go out and get
exposure to an asset class either broadly or granularly through an
index-based strategy. When you see an index ETF, you automatically
know whether you want that beta exposure or not. But in an active
fund, you look at a manager's track record and you choose whether
to add that to your mix or not.
:Meaning, ideally investors would own, say, (NYSEArca:SPY) and then
add various active funds to complement and/or hedge their
:Definitely. With active management, you might want different
management approaches to a certain exposure, like one manager who
focuses on fundamentals, one who is keen on technicals, etc. In the
end, it's all about getting manager-style diversification on top of
your asset class diversification.
:If the potential is this great, why are so many actively managed
ETFs struggling to stay afloat?
:To put this into perspective, if you look at the first four years
of index-based strategies-ETFs first came to be in 1993-and look at
the first four years of active management, with the first actively
managed ETF coming to market in 2008, you will see that active
funds have gathered far more assets and launched far more products
in that same time frame. On a relative basis, active ETFs have
taken off to a great start.
:But one could argue that active ETFs are entering a
well-established marketplace already where index funds had to blaze
a new trail.
:I have to give credit to index ETFs for laying the groundwork, no
doubt. But conversely, I can also say that the early ETFs were very
institutional-focused, they were big-ticket items. Active ETFs are
largely not for institutions right now; they have tended to target
the smaller, retail investor, so it been harder to accumulate
assets because they are smaller ticket items. I do believe
institutional will use active ETFs, but it will definitely take
some time and growth.
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