There are two big lines of contention with actively managed ETFs that can generally be boiled down to fees and performance.
All things being equal, active ETFs are typically more expensive than their passive index counterparts. This is primarily due to the ongoing research, security selection, and overall maintenance of the fund. The manager expects to be paid for their expertise, which takes considerably more effort to implement than a computer tracking a steady basket of stocks with little turnover.
High fees are particularly egregious when actively managed funds underperform their benchmark or experience spotty track records. However, that doesn’t mean every single actively managed ETF should carry this negative stigma. In fact, there are several that have adopted reasonable fee schedules with the practical expectation that performance can be enhanced through the underlying mix of securities.
iShares Enhanced U.S. Large-Cap ETF
iShares Enhanced US Large-Cap (NYSE:IELG) has the lowest expense ratio of any actively managed ETF at just 0.18%. This fund is managed by a research and portfolio management team at BlackRock (NYSE:BLK) and seeks to own approximately 150 large-cap stocks with high quality factors. The screening process implemented in IELG is based on quality, value, and overall market cap size in order to select stocks for long-term capital appreciation.
Now over the last year, IELG has had very similar performance as the iShares S&P 500 ETF (ARCA:IVV). In fact, these funds have almost moved perfectly in tandem, despite brief periods of price divergence. IVV has a slightly lower expense ratio of 0.07%. However, you may be inclined to pay slightly more for the potential of market beating returns in IELG.
BlackRock also has an international version of this fund in the iShares Enhanced International Large-Cap ETF (NYSE:IEIL), which charges a 0.35% expense ratio. This is very similar to the 0.33% cost to own the iShares MSCI EAFE ETF (ARCA:EFA) and may be worthy of consideration for a core international holding as well.
RiverFront Strategic Income Fund
The RiverFront Strategic Income Fund (NYSE:RIGS) is billed as a total return bond fund with a “go anywhere, do anything” mentality. The fund can invest in a multitude of fixed-income sectors that it attempts to optimize according to the current interest rate and credit environment.
This actively managed ETF charges a net expense ratio of 0.22%, which is currently in force until at least March 31, 2016. After that period, the fund manager can opt to remove a fee waiver component that would increase the management fees to 0.46%.
Currently, the RIGS portfolio is made up of mostly short-duration, high yield U.S. bonds. The fund has a 30-day SEC yield of 3.50% and dividends are paid monthly to shareholders.
This style of fund may be attractive to investors who are looking for a tactical opportunity with the potential for outperformance during a shifting interest rate environment. RIGS will likely have a lower sensitivity to interest rates than a core holding such as the Vanguard Total Bond Market ETF (NYSE:BND).
Remember that with an actively managed bond fund, regular analysis of the underlying holdings and positioning is essential. That way you can stay on top of any significant changes to the investment style and ensure it fits within your overall risk or portfolio guidelines.
iShares Short Maturity Municipal Bond ETF
The newly launched iShares Short Maturity Municipal Bond ETF (BATS:MEAR) focuses on a portfolio of short duration national municipal bonds. This ETF charges an expense ratio of 0.25%, which is identical to both the iShares National AMT-Free Muni Bond ETF (NYSE:MUB) and iShares Short-Term National AMT-Free Muni Bond ETF (NYSE:SUB).
In this instance, there is no premium price for an actively managed fixed-income portfolio versus a passive index. The goal of MEAR is to maximize tax-free income, while mitigating the effects of interest rate risk by holding near maturity bonds. The current portfolio has an effective duration of 1.34 years.
Right now, the MEAR portfolio has 32% cash, which will likely be deployed as the new ETF continues to build out its core holdings. One advantage of the active mandate is that the fund can hold higher cash levels for longer periods of time, when deemed appropriate. This may be used as a tactic to manage risk or as dry powder for new investment opportunities.