Morningstar. “The challenges that [active managers] face in picking
good securities that do at some point in time prove to be underpriced
still apply here, and there’s still a fee to be considered.”
These new ETFs won’t necessarily be particularly cheap.
Active managers want to charge a premium over index-tracking
funds to compensate their stockpicking efforts and may wish to
discreetly finance distribution efforts. As Messinger says, trading
costs for these funds could also be higher. The regulator wants
offering documents to make this clear.
And then there are the alternatives. T. Rowe Price, Fidelity
Investments, the New York Stock Exchange, and Blue Tractor Group
have all proposed different ways to create ETFs based on actively
managed strategies with less frequent disclosure. While none has
won regulatory approval yet, they could one day vie with McCabe’s
structure for investor attention.
For now, the ActiveShares idea is gaining traction. American
Century Investments is moving to list growth and value funds using
McCabe’s design, Gabelli Funds has sought permission to start
10 strategies, and other licensees include Goldman Sachs Asset
Management, Capital Group, and Legg Mason, which owns 20%
of McCabe’s company. Licensing the structure is free; asset
managers will pay a portion of their revenue only as these funds
attract assets.
The struggle to get to this point reminds McCabe of the
decade of tribulations endured by the eponymous hero of Homer’s
The Odyssey, a favorite book from high school.
“If I had known at the time it was going to take that long, and
the effort—it was going to be that hard or that expensive—I proba-
bly wouldn’t have started it,” he says. “But when I’m an old, gray man
someday, I’ll look back on this as a tremendous accomplishment
to be able to move a market as massive as this—hopefully in a very
good direction.”broker- dealer affiliate of Virtu Financial. “But we have a good idea
of how to price this. You’re going to have a good universe of
market makers.”
Investors may prove tougher to attract. The S&P 500 index
of U.S. stocks gained more than 35% in the five years through 2018,
and it’s available via an ETF at just 30¢ for every $1,000 invested.
By contrast, fewer than 1 in 5 funds that actively picked U.S.
large-capitalization stocks beat that benchmark over the same
period, data from S&P Dow Jones Indices show. The lower embed-
ded costs of ETFs can help stockpickers be competitive on expenses,
but they won’t transform a dud strategy into a success.
Put simply, can an ETF structure save active managers?
“It’s packaging something that people haven’t wanted for
years,” says Ben Johnson, director of global ETF research at
Evans covers ETFs at Bloomberg News in New York.The Growing Allure of a Bargain
ETF assets, by expense ratio tier in basis points0 - 10
11 - 20
21 - 40
41 - 60
61 - 80
81+0 $0.5t $1.0t $1.5t2008 2013 2018Source: {BI ETF}<GO> INSIDE THE TERMINAL 31