McKinsey: Active ETFs May Be Next Chapter


ETFs have revolutionized the U.S. money management industry since the first one came to market 18 years ago, and are here to stay. More to the point, the next phase of ETF development is likely to be different than the first, involving more competition and, quite possibly, more actively managed funds, acccording to a study by McKinsey & Company.

Indeed, about 99 percent of the more than $1 trillion in ETF assets gathered since the SPDR S&P 500 ETF (NYSEArca:SPY) was rolled out in January 1993 are in index strategies. But McKinsey, extrapolating from the growth pattern of index ETFs, said that active ETF strategies have the potential, within a decade, to reach 10 percent of all active U.S. mutual fund assets, or more than $1 trillion in assets.

It cited the fact that many players in the active mutual fund world, not sure whether to play offense or defense, have filed more than 800 applications for new active funds with the Securities and Exchange Commission, as we talked about in a piece last year titled “What’s Up With All The 40-App Filings?”

McKinsey said that while the Securities and Exchange Commission’s ongoing inquiry into derivatives use in mutual funds and ETFs launched in March 2010 has slowed the introduction of actively managed ETFs, it sees a number of factors that augur well for the development of more active strategies, including the arrival of bigger names in the space, in a passage in the study that seemed a clear reference to Pimco.

“A concerted move toward active ETFs over the last 12 to 18 months by one of the world’s largest fixed-income managers was a milestone for active ETF evolution, prompting many managers to reexamine and ramp up their active ETF strategies,” the study, obtained by IndexUniverse, said.

Pimco, the Newport Beach, Calif.-based company that jumped into the world of active ETFs in the past year, and its Enhanced Short Maturity Strategy Fund (NYSEArca:MINT), has emerged as an ETF-industry option to traditional money-market funds in times of market turmoil. It had $1.44 billion in assets as of Sept. 8, according to data compiled by IndexUniverse.

“Several other recent product announcements by high-profile managers (both traditional and ETF managers) are strong evidence of a renewed focus on active ETFs,” the study said.



iShares Rocks The Boat

Indeed, an iShares filing last week asking the SEC to give it permission to bring to market nontransparent ETFs was clearly one of the bigger ETF-industry development in quite a while. iShares is the world’s biggest ETF company, and has only one actively managed ETF, with $128 million, a tiny fraction of its total assets of nearly $440 billion.

The filing, if approved, could be a game-changer, because all active ETFs currently on the market must disclose portfolio holdings daily. iShares was proposing a way for ETFs to only disclose holdings periodically, as is the case with actively managed mutual funds that disclose what they own quarterly.

Among the other reasons that active ETF strategies could gain traction, McKinsey cited the fact that many active ETFs will cross the three-year barrier, qualifying them for rating by Morningstar and thus bringing them to the attention of far more financial advisors.

It also said the SEC is likely to clarify rules on converting mutual funds into ETFs, which could open the floodgates of asset gathering should mutual funds decide fund conversion is the way they want to enter the market for actively managed funds.

More broadly, McKinsey also said that while index ETFs will continue to rake in assets, the competitive environment will likely make growth in the marketplace slower than the 30-percent-a-year rate it has been enjoying.

It cited fund closures as one sign that competition is stiffening. It said that between 2000 and 2007, just 10 ETFs were shuttered. In the next three years, more than 150 were shut down.

“As success becomes less certain for ETF launches, sponsors are taking a fresh look at the

value proposition they offer investors and advisors, and seeking fresh sources of growth,” the study said, citing active strategies, new modes of distribution and more focus on less mature markets, such as in Asia or Europe.

Overall, McKinsey said total global ETF AUM could grow from about $1.5 trillion today to between $3.1 trillion and $4.7 trillion over the next five years.


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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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