Actively Managed ETFs Small, But Growing
Traders Magazine Online News, April 27, 2012
During the creation-redemption process, a lead market maker can buy the underlying components of an ETF and create a new share for an investor, or can redeem an ETF share, selling the components of the ETF.
Damon Walvoord, director of index and ETF sales and trading at Susquehanna International, which acts as an LMM, said that in addition to aiding tax efficiency, the creation-redemption process means that ETFs are always at least as liquid as their underlying assets, even if they trade at a low average daily volume.
In the past, most of the expansion in ETFs has been from index products, but actively managed funds could be the next frontier of growth, according to Walvoord.
One might think that active managers would be afraid of giving away their expertise with ETFs, since those vehicles are fully transparent. Noah Hamman, founder and chief executive officer of the ETF issuer AdvisorShares, said actively managing an ETF means that investors are free to simply copy a strategy without paying a management fee, but as a practical matter, that usually doesnt happen.
Most rational people arent going to go every day to my Web site to see what percentage each holding is, Hamman said.
Don Suskind, ETF product manager at PIMCO, agreed. He noted that even before it got into the ETF business, his company always tried to be transparent and communicative, and that transparency had never hurt PIMCOs business in the past.
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