7 Actively Managed ETFs to Buy for an Edge
Actively managed ETFs are starting to blossom in popularity. Investors unfamiliar with the space can start with these seven active funds.
It has taken some time, but actively managed exchange-traded funds (ETFs) are finally gaining traction with investors.
According to new data from ETFGI, a leading ETF consultant, ETFs and exchange-traded products (ETPs) had net inflows of $37.2 billion in July, bringing year-to-date net inflows to $226.3 billion, bringing the industry to a whopping $4.6 trillion in assets.
Actively managed ETFs and ETPs grew assets by 8% in July to $194 billion – a record amount for the late-blooming product offering. Unsurprisingly, more than two-thirds of those assets are invested in fixed-income ETFs and ETPs.
One of the game-changers for actively managed ETFs could be the movement to semi-transparent funds (more on those in a bit). American Century is leading the charge in this area, which has resulted in an uptick in the number of new active ETFs. Through the end of June, 63 passive ETFs had launched versus 68 active products – the first time in more than 20 years that active has outdone passive.
Here are seven actively managed ETFs to consider for your portfolio. This is a list of equity and fixed-income options – including one of the newer semi-transparent offerings – that are right for a variety of risk tolerances and investing horizons.
Data is as of Aug. 31. Yields represent the trailing 12-month yield, which is a standard measure for equity funds, unless otherwise indicated.
ARK Innovation ETF
- Total assets: $8.3 billion
- Dividend yield: 0.2%
- Expenses: 0.75%, or $75 annually for every $10,000 invested
Catherine Wood is the founder, CEO and chief investment officer of Ark Investment Management LLC, which currently offers five actively managed ETFs – including the Ark Innovation ETF (ARKK, $95.33) – and two index ETFs.
The veteran portfolio manager started the innovation-focused investment firm in 2014, after spending 12 years at AllianceBernstein, where she managed more than $5 billion for its global thematic strategies.
Wood gained notoriety in February 2018 when she made a bold prediction that Tesla's (TSLA) share price was going to $4,000. "If we're right, this stock in our models is going to $4,000," Wood said on CNBC. "If we're wrong, and all they do is electric, our bear case is $600." Then in January 2020, she upped her five-year price target on Tesla to $6,000.
So far, so good. Tesla's shares, which traded around $310 per share in February 2018, now trade around $2,440 (before adjusting for Tesla's recent stock split).
On to ARKK.
The Ark Innovation ETF is based on Wood's belief that innovation drives growth. She and her team are interested in innovative companies that are disrupting industries and sectors. There's no doubt that Tesla, which makes up nearly 11% of holdings, fits that mold.
ARKK also holds the likes of medical genetic testing company Invitae (NVTA) and payments firm Square (SQ) at 7.2% and 6.2%, respectively. The top 10 holdings account for a little more than half of the ETF's $4.8 billion in total net assets, which are typically dispersed among 35 to 55 stocks.
This actively managed ETF has generated a five-year average annual total return of 38.6%, putting it among the top 1% in the technology category over that time. In fact, ARKK is in the top 1% for its category over the trailing three-month, one-year and three-year periods, too
Pimco Enhanced Short Maturity Active ETF
- Total assets: $14.3 billion
- SEC yield: 0.53%*
- Expenses: 0.36%
Warren Buffett stated in his 2013 letter to Berkshire Hathaway (BRK.B) shareholders that the trustee of his estate shall invest the cash allocated for his wife upon his death to a low-cost S&P 500 index fund (90% of the funds) with the remaining 10% to go into short-term government bonds.
Simple and sound advice.
The Pimco Enhanced Short Maturity Active ETF (MINT, $101.88) is about as short-term as you can get, with the effective duration of the 800 holdings averaging 0.7 years, indicating that for every 1-percentage-point hike in interest rates, MINT would fall 0.7%; the effective maturity is slightly lower at 0.5 years. This active ETF's primary goal is to preserve capital and maintain liquidity, while also generating a little income.
MINT has total net assets of $14.3 billion, making it one of the largest actively managed ETFs in America. A $10,000 investment in the ETF from its November 2009 inception is worth approximately $11,756 through June 30, or an annualized total return of 1.52%.
Manager Jerome Schneider, Pimco's head of short-term portfolio management, has argued that traditional short-term allocations to Treasury bills and money market funds don't cut it. The problem, Schneider argued in November, is that money market funds specifically only generate returns from yield, failing to deliver capital appreciation. By shifting some money market assets to short-term bond strategies benchmarked to the three-month Libor (London Inter-Bank Offered Rate), investors can generate slightly higher returns on their money with minimal additional risk, he said. And since then, he's been right.
If you're parking money, MINT is an excellent vehicle in which to earn short-term returns.
* SEC yield reflects the interest earned for the most recent 30-day period after deducting fund expenses. SEC yield is a standard measure for bond funds.
SPDR DoubleLine Total Return Tactical ETF
- Total assets: $3.2 billion
- SEC yield: 2.0%
- Expenses: 0.55%
The SPDR DoubleLine Total Return Tactical ETF (TOTL, $49.40) isn't just a member of the Kip 20 – Kiplinger's list of the 20 best cheap ETFs. It has managed to soak up a significant amount of assets since inception in February 2015.
A big part of that has to do with the ETFs subadvisor, DoubleLine Capital. The investment manager's CEO, Jeffrey Gundlach, is commonly referred to as the "New Bond King" for correctly predicting several market-related events, including a decline in U.S. Treasury yields.
In addition to Gundlach, DoubleLine Deputy Chief Investment Officer Jeffrey Sherman is responsible for the day-to-day management of the fund.
DoubleLine's aim is to invest at least 80% of its total net assets in fixed-income securities. As a tactical ETF, it isn't restricted to credit quality, which means Gundlach and company can invest practically anywhere, anyhow, in search of above-average returns.
The portfolio, which currently includes 1,060 holdings, has a turnover rate of 47%, which means the managers turn the entire portfolio around approximately every two years. It has an options-adjusted duration of 3.4 years and an average bond coupon of 2.8%. The ETF's benchmark, meanwhile, has 11,780 holdings with a duration of about six years and an average coupon of 3.1%.
Residential and commercial mortgage-backed securities account for more than half of the portfolio, followed by Treasuries (28.8%), investment-grade corporates (6.1%) and emerging-market sovereigns (5.2%), with sprinklings of junk, bank loans and other types of debt. Almost 70% of the holdings are invested in Aaa-rated debt – the highest quality available. And approximately 65% of its holdings mature in five years or less.
First Trust Long/Short Equity ETF
- Total assets: $295.1 million
- Dividend yield: 0.5%
- Expenses: 1.60%
The First Trust Long/Short Equity ETF (FTLS, $44.22) looks to generate an above-average long-term total return by investing in a portfolio of long and short equity positions. In other words, it simultaneously bets on and against stocks.
FTLS launched in September 2014 and has gathered decent total assets in its roughly six years of existence. Its annualized total return since inception through June 30 is 6.3%, which is roughly 370 basis points (a basis point is one one-hundredth of a percent) less than the S&P 500 over the same period. But before you toss FTLS in the waste bin, consider that it has a stellar reputation among its long/short peers for delivering excellent risk-adjusted returns.
Earlier this year, demand for long/short ETFs began to rise as investors worried about the direction of stocks because of a faltering economy. The rationale was that the short exposure – First Trust Long/Short Equity ETF has a current short exposure of nearly 29% to go with long exposure of about 96% – would provide a bit of downside protection against a falling market. And it did. FTLS dropped only 20.5% between the February market peak and March trough, versus roughly 34% for the S&P 500.
Now that the markets have fully recovered, the demand for ETFs such as FTLS have slowed. However, volatility in the markets could heat up again given uncertainty over COVID-19 relief, the spread of the virus itself, the upcoming presidential election and seasonality.
At the moment, "top" short positions include Ball Corp. (BLL), Coca-Cola (KO) and Kellogg (K). But its top shorted sector is information technology at 5.7%, followed by consumer discretionary at 4.8%.
Just note that FTLS isn't cheap. Between management fees, margin and short sale fees, you're looking at about 1.60% annually for First Trust's guiding hand.
American Century Focused Dynamic Growth ETF
- Total assets: $209.2 million
- Dividend yield: N/A
- Expenses: 0.45%
Kansas City-based American Century Investments was the first asset manager to launch actively managed semi-transparent ETFs in the U.S. On April 2, it launched both the American Century Focused Dynamic Growth ETF (FDG, $68.14) and the American Century Focused Large Cap Value ETF (FLV). It has since launched two more such funds centered around environmental, social and governance (ESG) investing.
The ETF provider has eyed launching semi-transparent ETFs for more than two years. In November 2017, it signed an agreement with Precidian Investments LLC to license its patented ActiveShares structure, which allows exchange-traded funds to avoid disclosing holdings on a daily basis. FDG and its stablemate are the product of a lot of hard work.
So, what is a semi-transparent actively managed fund? As the latter half suggests, there are human hands at the wheel. However, whereas fully transparent ETFs list their holdings on a daily basis, semi-transparent funds can and will only update investors on the holdings every quarter, much like mutual funds.
While that doesn't sound like a good deal for shareholders, the argument is that this prevents other investors from front-running the fund's investment strategy, thereby getting a free ride off the fund manager's hard work.
The benchmark for FDG is the Russell 1000 Growth Index. The ETF's top holdings, reported back at the end of July, are Amazon (AMZN, 8.7%), Tesla (4.9%) and Google parent Alphabet (GOOGL, 4.6%). Unsurprisingly, technology is the top sector at 35% of assets, followed by consumer discretionary (24%) and health care (13%).
American Century Focused Dynamic Growth ETF has gathered more than $200 million in net assets in just five months, which might be indicative of how popular semi-transparent ETFs are about to become.
BlackRock U.S. Equity Factor Rotation ETF
- Total assets: $89.6 million
- Dividend yield: 1.6%
- Expenses: 0.30%
The BlackRock U.S. Equity Factor Rotation ETF (DYNF, $28.91) was launched by the world's largest ETF provider on March 7, 2019. Since inception, it hasn't really gotten much attention, sitting at less than $90 million in net assets.
It's possible that investors just don't know much about factor rotation investing, so let's get you up to speed.
The asset managers start with a large basket of stocks that exhibit five different factors: low volatility, small size, positive stock trends, financial health and cheap valuation. That basket is equally weighted across all five factors. Management then uses four short-term indicators to select the "ultimate" portfolio:
- They look at each stock's current valuation relative to its historical valuation.
- They examine the best and worst stocks for each factor based on the current market environment.
- The managers consider where we are in the current business cycle to determine which factors are more favorable.
- They select the factors with strong recent performance.
DYNF currently has about 620 holdings, and the top 10 – which include Apple (AAPL), Intel (INTC) and Microsoft (MSFT) – account for just 18% of the portfolio. (This clearly isn't to be confused with a high-conviction "best ideas" strategy.)
Top sectors are technology (25.2%), health care (16.9%) and consumer discretionary (11.9%). The average market cap for DYNF's holdings is $62.9 billion, far less than its large-cap blend peers. Mid-cap stocks make up nearly 30% of the portfolio, which is double the category average.
To date, DYNF has delivered uninspired performance relative to the markets as a whole. But it has less than two years under its belt, and a bizarre two years those have been. Give this one time.
SPDR SSGA Global Allocation ETF
- Total assets: $254.8 million
- SEC yield: 2.6%
- Expenses: 0.35%
Most of the actively managed ETFs in this article are U.S.-centric. The SPDR SSGA Global Allocation ETF (GAL, $39.85) breaks this trend by broadening its horizons. GAL, launched in April 2012, has managed to gather a fair amount of capital in the eight-plus years it has been available to investors.
The ETF takes a fund-of-funds, multi-asset-class approach to its portfolio selection, using tactical asset allocation decisions to manage risk. Just understand that GAL has a one-size-fits-all approach, so it might not meet every investor's risk tolerance and goals for long-term returns.
The top three asset classes are U.S. equities (32.8% weighting), international equities (24.1%), and U.S. fixed income (15.6%). Overall, equities represent 57% of the portfolio, fixed income is another 36%, and the rest is in commodities and cash.
GAL gets its exposure through funds such as the S&P 500-tracking SPDR S&P 500 ETF Trust (SPY), SPDR Portfolio Developed World ex-US ETF (SPDW) and and the SPDR Portfolio Intermediate Term Corporate Bond ETF (SPIB). Only one of its holdings – the Invesco DB Gold Fund (DGL) – isn't a State Street ETF.