Active Management

Vanguard On The Future Of Low-Cost Active Management

Active management will survive, and maybe thrive, if it’s available at a low cost. ETFs, then, offer an attractive vehicle.

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Active management is not new for Vanguard. We have believed in low-cost, long-term active strategies since our founding more than four decades ago. In fact, Vanguard Wellington FundTM started in 1929, and today Vanguard has more than 60 traditional active funds.

With the recent launch of our first active ETFs—a suite of low-cost factor-based funds—we wanted to share some thoughts regarding the past, the present, and the future of active management in the context of ETFs as you seek to find the best ways to help your clients meet their goals.

In short, we believe active management strategies1 do have a future, though we also believe that the relatively expensive active strategies of the past are likely to fall increasingly out of favor.

First, a little history …

As ETFs celebrate their 25th anniversary this year, there’s little doubt that ETFs are still widely associated with index investing. But did you know that U.S.-listed active ETFs have been around for more than a decade?

Since active ETFs became part of the ETF ecosystem, many firms and commentators have predicted that actively managed ETFs would likely fuel ETF development. Dozens of firms have filed with the Securities and Exchange Commission (SEC) to offer active ETFs in the hope of taking advantage of this potential opportunity.

As of February 28, 2018, the active ETF marketplace consisted of 208 ETFs offered by more than 60 issuers.

Active fixed income ETFs leading the way

Ten years into the age of active ETFs, it’s fair to say that investors have yet to adopt these investment vehicles the way they did their index-based counterparts. As of March 20, 2018, U.S.-listed ETF assets stood at about $3.6 trillion, with 2017 inflows shattering previous cash-flow records. Yet active ETFs languished in this extremely favorable environment of ETF adoption.

Since 2008, 271 active ETFs were launched, though 63 were shuttered, leaving the 208 cited above. That compares with about 1,700 index ETFs listed on U.S. exchanges today.

Active ETF launches

Active Management

Source: Vanguard, as of February 28, 2018.

The number of active ETFs accounted for only 11% of all ETFs on U.S. markets; assets in these strategies reached $40.6 billion, or less than 1.2% of all U.S.-listed ETF assets.2 Drilling into that relatively low figure, fixed income strategies dominated the active ETF space, gathering 75% of active ETF assets under management, Morningstar data show.

Despite the available runway for active ETFs, issuers still hesitate. At this time, the SEC requires firms to provide full transparency into ETFs’ daily holdings. Some issuers are concerned that this disclosure will prove harmful because it reveals proprietary alpha-generation techniques.

Read the full article here by by Rich Powers of Vanguard, Advisor Perspectives


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