Actively managed ETFs, which just make up for a tiny fraction i.e. 3.5% of the $5.7 trillion industry, have been growing steadily. These ETFs pulled in a record of more than $55 billion capital last year and $17.5 billion so far this year, bringing their AUM to $200 billion — almost double last year’s at the same time, according to data compiled by Bloomberg.
Most of the growth was driven by the products of Ark Investment Management, whose assets soared to about $50 billion from $3.6 billion a year ago. Five out of the seven ETFs managed by ARK Invest are actively managed. The most popular is Ark Innovation ETF ARKK, which has gathered $4.2 billion in assets so far this year and notched another record week of inflows (read: 6 Hot ETFs That Could be Investors' Darling in February).
This was followed by inflows of $3 billion in ARK Genomic Revolution ETF ARKG, $1.3 billion in ARK Next Generation Internet ETF ARKW, $1.2 billion in ARK Autonomous Technology & Robotics ETF ARKQ, and $880 million in ARK Fintech Innovation ETF ARKF.
These ARK Invest’s ETFs are designed to capture long-term appreciation and alpha uncorrelated to traditional indices or managers. They provide exposure to aggressive growth through a fund rather than individual stocks and complement traditional broad index based value or growth strategies (read: A Deep Dive into ARK ETFs).
Let’s delve into the characteristics of each of these five funds:
ARKK
ARKK invests in companies that benefit from the development of new products or services, technological improvements and advancements in scientific research related to the areas of DNA technologies (Genomic Revolution), industrial innovation in energy, automation and manufacturing (Industrial Innovation), the increased use of shared technology, infrastructure and services (Next Generation Internet), and technologies that make financial services more efficient (Fintech Innovation).
ARKG
This fund is focused on companies that are likely to benefit from extending and enhancing the quality of human and other life by incorporating technological and scientific developments, and advancements in genomics into their business. The companies held in ARKG may develop, produce or enable CRISPR, targeted therapeutics, bioinformatics, molecular diagnostics, stem cells, and agricultural biology.
ARKW
This ETF focuses on companies that are expected to benefit from the shift in technology infrastructure to cloud, enabling mobile, new and local services such as companies that rely on or benefit from the increased use of shared technology, infrastructure and services, Internet-based products and services, new payment methods, big data, the Internet of Things (IoT), and social distribution and media. These companies may develop, produce or enable cloud computing & cyber security, e-commerce, big data & Artificial Intelligence, mobile technology and IoT, social platforms, and blockchain & P2P.
ARKQ
This ETF focuses on companies that are expected to substantially benefit from the development of new products or services, technological improvements and advancements in scientific research related to, among other things, energy, automation and manufacturing, materials, and transportation. These companies may develop, produce, or enable autonomous transportation, robotics and automation, 3D printing, energy storage and space exploration.
ARKF
This fund invests in the company having a theme of Fintech innovation. The Adviser defines Fintech innovation as the introduction of a technologically enabled new product or service that potentially changes the way the financial sector works, which ARK believes includes transaction innovations, blockchain technology, risk transformation, frictionless funding platforms, customer facing platforms, and new intermediaries (read: 5 Top-Performing ARK ETFs Worth Your Attention Now).
The popularity of these ETFs will continue given their “disruptive innovation” in the respective areas that are considered the next big things in technology. ARK defines disruptive innovation as the introduction of a technologically enabled new product or service that potentially changes the way the world works.
Additionally, the interest in active ETFs will be driven by the new non-transparent funds -- which shield their holdings from front running -- and were launched by firms such as American Century and T. Rowe Price Group Inc. The category could reach $3 billion in assets by the end of the year, according to Bloomberg Intelligence.
However, investors should thoroughly consider the pros and cons before investing in active ETFs.
Active ETFs: Pros and Cons
Actively managed funds are not confined to low-cost index-tracking but focus on talented stock pickers delivering big returns. These funds use various skills and attributes (like top-down approach, bottom-up approach, value investing, growth investing or absolute returns strategy) and could shift their allocations and positions according to the market environment. This helps to diversify assets in a portfolio and provide investors with a vehicle that aims to outperform a benchmark, especially in illiquid or inefficient markets or even if the odds are against it, or to give access to niche parts of the market.
Though these funds attempt to beat the market, they might underperform their passive counterparts as most fund managers fail to match the return of the indexes with that of the funds’. Additionally, active funds are arguably expensive as these involve research expenses associated with the managers’ due diligence and additional cost in the form of wide bid/ask spread beyond the expense ratio. These funds also require daily portfolio disclosures, which could hamper the competitive portfolio composition.
Despite all drawbacks, active ETFs could generate superior risk-adjusted returns, after expenses, if chosen carefully.
Want key ETF info delivered straight to your inbox?
Zacks’ free Fund Newsletter will brief you on top news and analysis, as well as top-performing ETFs, each week. Get it free >>
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
To read this article on Zacks.com click here.
Zacks Investment Research
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
