A few weeks ago, we introduced the ETF Management Matrix in partnership with ETF Research Center. At the ETF Think Tank, we are dedicated to the education and growth of advisors and investors utilizing the benefits of ETFs. The purpose of the ETF Management Matrix is further education around ETFs. It is driven by our security master, which seeks to provide a common language for discussing and researching ETF data. This week we dive into the upper left corner of the matrix and focus on the smallest category: Active & Diverse ETFs (AD).
The AD category has the least amount of listed funds with only 49 out of 1,408 non-leveraged equity ETFs covered. The AD category represents only 3.5% of equity ETFs and 28.5% of active equity ETFs. What does stand out is the average expense ratio, which is less than half of the more concentrated active ETFs. As we noted in the weekly KPI, Active ETFs represent 10.17% of ETF industry revenue, but due to the low expense ratios, the AD category only represents 5.8% of the revenue generated by Active ETFs. Surprisingly, there are more assets in AD category than in the Active Semi-Diverse category. Now, let’s explore the AD ETFs with the most assets.
Old Dogs, New Tricks
The AD category is dominated by assets from Avantis, JP Morgan and Vanguard. Most of these funds are affiliates to American Century and their wholesaling machine. The assets have likely come from intermediaries and advisors rather than individual investors. These ETFs, although filed as active, seem to be more like low-tracking error-style box-focused strategies.
As you can see from our ETF Think Tank Smart Cost Calculator, AVUS captures 95% of the securities in the Vanguard Total US Equity ETF (VTI). By weighting these securities differently the position overlap drops to 70%. Further, when looking at the closest 10 ETF competitors by overlap, 90% are passive. This implies that the primary consumer of these AD ETFs are traditional style box mutual fund investors that are now embracing the benefits of the ETF structure.
From an asset gathering, revenue generating and fee standpoint, it is obvious why issuers are focusing on more concentrated active ETFs. That said, there are two interesting standouts in the top ten ETFs of the AD category: Knowledge Leaders Developed World ETF (KLDW) and Cambria Shareholder Yield (SYLD).
The table above shows that despite these two funds offering more diversification than the traditional index, they both provide active share at or above 90%. This suggests that there is room in the marketplace for AD ETFs that truly provide a differentiated portfolio.
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