CHAPTER 5
Actively Managed ETFs
For nearly 20 years, all exchange-traded funds (ETFs) brought to the market replicated well-known benchmark indexes. In 2003, Powershares introduced the first ETFs that followed quantitative indexes based on active management strategies. The golden cow for ETF providers, however, may well be actively managed ETFs that do not follow indexes. Actively managed ETFs invest in a portfolio of securities that is subjectively chosen by a fund manager on their own rather than follow a rules-based index. The idea is to perform better than a benchmark index through flexible active management.
Actively managed ETFs are registered with the Securities and Exchange Commission (SEC) as an investment company. The actively managed ETF would list its shares on a national securities exchange, and investors would trade the ETF shares throughout the day at various prices in the secondary market. The problem with active ETFs is in the daily reporting of positions and reporting the intraday price without giving away exactly what the fund manager is doing.
Actively managed ETFs should not be confused with ETFs that follow custom indexes that use active strategies. (See Part II.) An actively managed ETF involves the direct selection of securities by the company that is managing a fund. There is no index to track.
The First Filings
In February 2007, Bear Stearns was the first company to file a full prospectus for an actively managed ETF. The filing outlined a unique money ...
