Active managers launching news ETFs in response to institutional demand
Large active asset managers are looking to expand their ETF offerings and have filed applications with the SEC for both active and passive funds. Other firms, including Janus Capital and New York Life Investment Management, have recently made acquisitions to enable them to enter the ETF market.&nbsp;
“Investors have started to show a preference for ETFs for a number of reasons,” said Thomas K. Hoops, executive vice president and head of business development at Legg Mason Inc., Baltimore. “They like the transparency, the tax-efficiency, and the ability to get into or out of the strategy intraday.”

Mr. Hoops added he believes that ETFs, which are typically used for market cap-weighted passive strategies, can be used to take advantage of additional approaches, such as smart beta.

“We also view the ETF as another vehicle to access our strategies,” he explained.

Not only has Legg Mason filed to offer ETFs in the future — Mr. Hoops declined to give a time frame — but the firm in February also recruited two executives from Vanguard Group to lead its new ETF strategies.

Mr. Hoops said Legg Mason's managing director and head of ETF product management, Rick Genoni, and ETF product management director, Brandon Clark, will both “help finalize the strategy and help execute it as (they) move forward.”

While firms like Legg Mason, T. Rowe Price and GSAM have yet to launch ETFs, Principal Global Investors launched its first — an active multiasset income strategy — in July.

Paul Kim, managing director and head of ETFs for Principal Global Investors, said he believes “now's a great time” to get into the ETF business, because the business is primed to grow.

“We want to be part of that growth,” Mr. Kim said.

He said money managers including Principal are thinking about ETFs as both an offensive and defensive offering.

On the offensive side, the funds are seen as a useful growth tool. On the defensive side, managers fear that not having an ETF could hurt their business.

Money managers, said Mr. Kim, are “seeing a lot of outflows from active equity mutual funds and inflows into passive equity ETFs. That worries a lot of managers; if they don't have an ETF presence that can be seen as a threat.

“As a global manager, we need to have an ETF strategy,” he added.

“ETFs have now become a very competitive tool (for institutions) to access beta on par with derivatives and mutual funds,” Mr. Kim added. “We still haven't seen a lot of adoption of active ETFs in the institutional space, but we think that, too, will grow over time.”

There's currently $29 million in the multiasset income ETF. Principal also plans to release passive strategies in the future.

Macrae Sykes, an analyst at Gabelli & Co. Inc., New York, noted the increased interest in liquidity, smart beta and customized solutions is leading to an increased interest in ETFs among institutional investors.

“I think for ETFs, there's an attractive component in the instant liquidity, as opposed to indexed mutual funds,” Mr. Sykes said. “And to the extent that there's a move (among asset owners) to tactical asset allocations, ETFs can be easily incorporated into that.”

Mr. Sykes added the move to use ETFs in lieu of traditional futures is another component of growth.