With AMP and Betashares recently launching the first of their joint venture actively managed ETFs, it’s timely to have a look at Exchange Traded Managed Funds (ETMFs), what they are, how they work and who offers them.
We won’t go into detail about all the characteristics of an ETF (you can find that out here), but one of the key characteristics of an ETF is it must be rules based in its underlying portfolio construction, following a pre-defined benchmark. The most common benchmark an ETF will follow is a market cap index, such as the S&P/ASX 200, where the top 200 shares listed on the ASX are represented by their relative size. This means Commonwealth Bank will represent about 10% of an investor’s holdings in a S&P/ASX 200 ETF, as Australia's largest company, it makes up around 10% of this index. There are of course other benchmarks that ETFs follow, and our look at Smart Beta ETFs uncovered a number of these.
Secondly, ETFs are open ended in nature, meaning the number of shares on issue can grow or shrink based on investor demand. One of the more complex components of ETFs is the role that ‘market makers’ play in ensuring that these units are available at close to the underlying asset value. More information on the role of market makers can be found from this post by Betashares. The ASX provides a list of who the market makers are for ETFs listed on the ASX.
The key difference of an ETMF compared to an ETF is an ETMF is actively managed, meaning rather than track a rules based index, a fund manager is actively trying to outperform. The name says it all, they are exchange traded versions of traditional actively managed funds. As the underlying investments are the Intellectual Property of the fund manager, they do not release this to anyone else, and the role of market maker is undertaken by the fund itself. An ETMF is traded on the ASX just like an ETF.
The managed fund industry in Australia is huge, and because of our compulsory superannuation scheme, is one of the biggest in the world. Surprisingly the industry has been slow to innovate, with many funds not available to invest directly by retail investors, meaning one has to use a “Wrap” type platform which includes an additional layer of fees to access the managed funds, or complete paper based application forms, which include the investor providing certified copies of ID as part of the application process. Redemptions involve more paper forms, and often weeks of delays in the request being processed. Investors’ tolerance for this sort of inefficiency is understandably waning, and the efficiency of a single brokerage account allowing buying and selling of funds with a single click of a button is appealing. It’s partly because of this that investors are now looking to ETMF’s, and managed fund providers are beginning to meet this demand by providing their own ETMF products.
As ETF Watch has often reported, one of the most popular alternatives for investors seeking active fund exposure is through LICs, which invest at manager discretion, however differ to ETFs in that they are close ended in nature, meaning they can trade at a premium or discount to the underlying Net Tangible Assets. The major differences between ETFs and LICs are outlined in the ETF Watch ETF & LIC Guide.
A second option, unknown by many is the ASX mFund service. mFunds allow access to a limited range of unlisted managed funds through a regular brokerage account, so instead of lengthy application forms one can buy their chosen managed fund by simply opening a brokerage account (the same account you can buy ETFs and LICS with). More information about mFunds can be found at the ASX website.
The ETF Watch Funds database identifies 12 ETFs listed on the ASX which are actively managed. Not all of these are Exchange Traded Managed Funds however, with some following a more actively managed index (sometimes the lines between Smart Beta and Actively Managed are blurred).
The table below outlines the Exchange Traded Managed Funds that ETF Watch has identified.
|TIcker||Name||Date listed||Fund Size|
|AOD||Aurora Dividend Income Trust||Nov 2005||$15.5m|
|GLIN||AMP Capital Global Infrastructure Securities||Jun 2016||$9.8m|
|KII||K2 Global Equities Fund||Jul 2015||$39.9m|
|KSM||K2 Australian Small Cap Fund||Dec 2015||$22.4m|
|MGE||Magellan Global Equities Fund||Mar 2015||$540.4m|
|MHG||Magellan Global Equities Fund (Currency Hedged)||Aug 2015||$28.8m|
|RENT||AMP Capital Global Property Securities Fund||Jun 2016||$9.8m|
The two new AMP offerings, launched earlier this month join a small cohort of ETMFs, the largest of which being the Magellan Global Equities Fund, whose total funds under management has skyrocketed to over $500m, up from under $200m only a year ago. Most of the new ETMFs have been launched in the last 12 months. Here are ETF Watch we think we’ll be seeing more by the end of the year, and will be sure to report any new listings as they come about.