These active ETFs have impressive returns, amid struggling competitors

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Back in December 2019, Barron’s predicts that 2020 will be the year of the actively managed exchange-traded fund. As it turns out, 2020 brought us some other news as well, but the ETF industry has lived up to our expectations. More than 100 active ETFs entered the market in 2020, accounting for around half of all new launches this year. This represents around fifty new launches three years ago.

Regulatory changes at the end of 2019 made this easier. The Securities and Exchange Commission now allows some ETFs not to disclose their holdings on a daily basis. This cleared a big hurdle for many active equity fund managers, who feared that the transparency typical of ETFs means that other investors could copy their trades and affect the price of their holdings, a strategy known as front-running. Many mutual fund giants rolled out semi-transparent active ETFs after the rule change; some small managers who previously only managed separately managed accounts have started offering their ETF strategies to a wider audience.

So far, these active ETFs seem more popular with providers than investors. As of this week, there are only $ 163 billion in active ETFs, or less than 4% of the $ 5 trillion industry. Most actively managed ETFs perform as well as actively managed mutual funds; that is to say not very well. Since the start of the year, active equity ETFs have performed very differently, with more than two-thirds ranking in the bottom half of their respective categories. Only a few have outperformed their passive peers.

This, of course, does not include new 2020 launches from some top notch companies like

T. Rowe Price

(ticker: TROW), Fidelity Investments, American Century and Dimensional Fund Advisors, who do not yet have a one-year track record. These companies have unique approaches and the best performing mutual funds whose strategies are now implemented in an ETF structure.

Barron’s took a look at the handful of top performing actively managed equity ETFs. Most have the characteristics of the best performing mutual funds: they make big bets on emerging trends, tend to hold fewer stocks, or use unusual strategies.

ARK Investments, founded by visionary economist and investor Cathie Wood, manages some of the top performing ETFs, thanks to Wood’s strong belief in disruptive innovations. Five of ARK’s seven ETFs are actively managed. The $ 13.6 billion

ARK innovation

(ARKK), $ 4.5 billion

ARK genomic revolution

(ARKG) and $ 4.2 billion

Next Generation ARK Internet

(ARKW) have all returned over 125% since the start of the year. The $ 1.1 billion

Autonomous technology and ARK robotics

(ARKQ) and $ 1.3 billion

ARK Fintech innovation

(ARKF), are up over 85%.

The $ 15.4 million

SoFi Gig Economy

(GIGE) also invests in a perspective of changing technology and consumption habits. Launched in May 2019 by fintech startup SoFi, the fund owns businesses that have transformed the way people buy goods, access services, and work, including the freelance market.

Fiverr International

(FVRR) and digital payment company

Square

(SQ). Since the start of the year, it has returned 85%.

The $ 268 million

Davis Select International

(DINT) and $ 138 million

Motley Fool Small Cap Growth

(MFMS) are two more efficient ones. Both are concentrated – each owns 25 to 30 stocks – and both have 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, since the start of the year.

For investors who wish to gain exposure to the larger but more active market, the $ 95 million

Sector rotation SPDR SSGA US

(XLSR) tactically distributes among

S&P 500

the different sectors of the index on the basis of a quantitative and qualitative analysis. Currently, the fund is overweight information technology, communications, consumer staples and industrials. In doing so, it beat the S&P 500 by two percentage points this year.

Likewise, the $ 22 million AI-Enhanced US Large-Cap (QRFT) QRAFT uses artificial intelligence and data to distribute it across different groups of factors – or stocks with characteristics like cheap valuation. , high quality or low risk. The fund has generated a 34% return since the start of the year, more than double the returns of the S&P 500.

Tactical allocation is a tricky business, however, and it doesn’t always come at the right time. The $ 625 million

Main sector rotation

(SECT) and $ 93 million

BlackRock U.S. Equity Factor Rotation

(DYNF), for example, are adopting similar strategies, but have both fallen behind the S&P 500 by about four percentage points since the start of the year. Although the SPDR and QRAFT funds are doing well so far, both were launched last year and still need more time to prove consistent outperformance.

Write to Evie Liu at [email protected]