ETFs, or Electronically Traded Funds, have always been mapped against major indices by mutual funds. A majority of funds still remain passive on this investment vehicle, but according to the latest developments, this might change sooner than expected. However, it wont be a jump into the ship by investors and firms must trade with caution. Baltimore-based money managers, T. Rowe Price Group, Inc. (NASDAQ:TROW) and Legg Mason, Inc. (NYSE:LM) Price received the approval from SEC early this month, whereas Legg Mason’s approval arrived in November 2012.
Nonetheless, the shift from passive to active ETFs trading crates a paradox for investors as they will get hit by higher management fees. On the other hand, ETFs are exemplary in tax efficiency and transparency. So, do the benefits outweigh the management fee burden, or is this going to chase investors away? Whatever the case is, it seems as though T. Rowe Price Group, Inc. (NASDAQ:TROW) and Legg Mason, Inc. (NYSE:LM) see an upside in the venture. It is only a matter of time before the two money managers get through the next stage and launch active ETFs market.
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Robert Goldsborough, ETF analyst with Morningstar, Inc. (NASDAQ:MORN) expects the two firms to move first, and is optimistic that the two firms will launch active ETFs before the end of this year. Meanwhile, T. Rowe Price Group, Inc. (NASDAQ:TROW) spokesman Brian Lewbart said the SEC approval granted the firm the right to launch a variety of products, but declined to reveal the specifics.
“If we introduce ETFs, our intent would be to offer products that are differentiated from offerings currently in the market and that deliver long-term value to our clients,” Lewbart wrote in an email. However, Goldsborough pointed that the firms might be assessing the right time to launch their products, as all other firms that have received the initial approval are yet to launch their products in the market.
Additionally, the firms would be cautious of getting started on a venture before putting everything in place. No one can be sure whether launching active ETFs products would draw more investors. It could be the vice versa. One of the main reasons people invest in mutual funds is because of the stability of returns, which basically equates to low risk appetite besides the added expense in management fees. So, why would investors jump to these products?
In fact, according to Lipper senior research analyst, Jeff Tjornehoj, half of the 33 active ETFs tracked by his firm had outflows in 2012. He actually points out that there are not many successful firms in actively traded ETFs. “There is really only one firm out there that has taken on actively managed ETFs with good success. That is Pimco,” Tjornehoj said. Pimco’s Total Return Exchange-Traded Fund, which is managed by Bill Gross added $3.7 billion in assets in 2012. The fund was set up in February last year.
Finally, while Active ETFs are deemed to be tax efficient investment vehicles for investors, the purported improvement in performance of the fund does not justify the hefty fees charged to investors. Patrick Collins, a financial planner with Greenspring Wealth Management in Towson, who uses ETFs for clients said, “From all the research out there, active management has very little impact on performance,” adding that he’d rather stick with passive ETFs. Ideally, not even the transparency in active ETFs, which comes in the form of daily price tracking is bIg enough to prompt an abrupt uptake of the new products.