36 BARRON’S December 7, 2020
FUNDS
Thanks to new SEC rules, actively managed
ETFs are being launched by the dozen. Most
have subpar performance. Not these.
These Active ETFs Stand Out
Amid a Lot of Mediocrity
B
ack in December 2019,
Barron’spredicted that 2020
would be the year of the
actively managed exchange-
traded fund. It turns out that 2020
brought us a few other news items,
as well, but the ETF industry did live
up to the expectation. More than 100
active ETFs came to the market in
2020, making up about half of all
new launches this year. That’s up
from just about 50 new launches
three years ago.
Regulatory changes in late 2019
facilitated this. The Securities and
Exchange Commission now allows
some ETFs to not disclose holdings
every day. This cleared a big hurdle
for many active stock fund managers,
who feared that the typical transpar-
ency of ETFs meant that other inves-
tors could copy their trades and affect
the pricing of their holdings, a strategy
known as front-running. Many mu-
tual fund giants have rolled out semi-
transparent active ETFs following the
rule change; some smaller managers
that previously ran only separately
managed accounts began offering their
strategies in ETFs to a wider public.
So far, these active ETFs seem more
popular among providers than inves-
tors. As of this week, there’s just $163
billion in active ETFs, less than 4% of
the $5 trillion industry. Most actively
managed ETFs perform about as well
as actively managed mutual funds; that
is to say, not all that well. Year to date,
active stock ETFs have shown widely
different performance: More than two-
thirds ranked in the bottom half of
their respective categories. Only a few
outperformed their passive peers.
This, of course, doesn’t include
2020’s new launches from some top-
notch firms likeT. Rowe Price
(ticker: TROW), Fidelity Investments,
American Century, and Dimensional
Fund Advisors, which don’t yet have
one-year track records. These firms
have unique approaches and top-
performing mutual funds whose strat-
egies are now implemented in an ETF
structure.
Barron’stook a look at the handful
of top-performing actively managed
stock ETFs. Most have the hallmarks
of top-performing mutual funds: They
make big bets on emerging trends,
tend to own fewer stocks, or employ
unusual strategies.
ARK Investments, founded by
economist and visionary investor
Cathie Wood, runs some of the best-
performing ETFs, thanks to Wood’s
strong conviction for disruptive inno-
vations. Five of ARK’s seven ETFs are
actively managed. The $13.6 billion
ARK Innovation(ARKK), $4.5 bil-
lionARK Genomic Revolution
(ARKG), and $4.2 billionARK Next
Generation Internet(ARKW) have
all returned more than 125% year to
date. The $1.1billionARK Autono-
mous Technology & Robotics
(ARKQ) and $1.3 billionARK Fin-
tech Innovation(ARKF), are up
more than 85%.
The $15.4 millionSoFi Gig Econ-
omy(GIGE) also invests with an eye
toward evolving technology and con-
sumer habits. Launched in May 2019
by financial-technology start-up SoFi,
the fund owns companies that have
transformed the way people buy
goods, access services, and work,
including freelancer marketplace
Fiverr International(FVRR) and
digital-payment firmSquare(SQ).
Year to date, it has returned 85%.
The $268 millionDavis Select
International(DINT) and $138 mil-
lionMotley Fool Small Cap Growth
(MFMS) are two other top performers.
Both are concentrated—each owns 25
to 30 stocks—and both outperformed
their diversified benchmarks: Davis
Select International beat the MSCI
ACWI Ex USA index by 12 percentage
points, and Motley Fool Small Cap
Growth beat the Russell 2000 Growth
Index by 22 percentage points, year to
date.
For investors who want exposure
to the broader market but in a more
active way, the $95 millionSPDR
SSGA US Sector Rotation(XLSR)
tactically allocates among the S&P
500 index’s different sectors based on
quantitative and qualitative analysis.
Currently, the fund overweights infor-
mation technology, communications,
consumer staples, and industrials. By
doing this, it has beaten the S&P 500
by two percentage points this year.
Similarly, the $22 millionQRAFT
AI-Enhanced U.S. Large-Cap
(QRFT) uses artificial intelligence and
data to allocate among different factor
groups—or stocks with characteristics
like cheap valuation, high quality, or
low risk. The fund has returned 34%
year to date, more than doubling the
S&P 500’s returns.
Tactical allocation is a tricky busi-
ness, however, and it doesn’t always
get the timing right. The $625 million
Main Sector Rotation(SECT) and
$93 millionBlackRock U.S. Equity
Factor Rotation(DYNF), for exam-
ple, adopt similar strategies, but have
both lagged behind the S&P 500 by
about four percentage points year to
date. While the SPDR and QRAFT
funds are doing well so far, both
were launched just last year and still
need more time to prove consistent
outperformance.B
By Evie Liu