A challenging return environment, however, hasn’t stopped investors from directing assets to these strategies. Of the forty-three ETFs tracked by FactSet, six have assets above $500 million, including the $1.3 billion RPAR Risk Parity ETF. (As of June 30, 34.4 million shares were held by wealth management firm Evoke Advisors and its affiliate, Advanced Research Investment Solutions LLC, which built the underlying index.)
“Managing assets within an active ETF is no different than other fund structures,” said Daniel Gamache, Denver-based executive director with Core Alternative Capital. “We find the liquidity and transparency of the ETF to be a distinct benefit to our investors.”
Mr. Gamache is part of the team running the $440 million Core Alternative ETF, which has achieved a 5.9% annualized return over the five years through Sept. 9, according to FactSet data on ETF.com. The annual expense ratio is 1.07% and the fund holds anywhere between 45 to 60 equity positions and short-dated index options. (The ETF has a blended benchmark of 60% S&P 500 index and 40% Bloomberg U.S. Aggregate Bond index.)
“Absolute-return investing can thrive in the ETF structure and its success is an outcome of the investment process implemented every day,” said Mr. Gamache, “not a byproduct of the fund structure it is housed in.”
Michael Green, portfolio manager and chief strategist officer at Simplify Asset Management in New York, also believes in the opportunity for ETFs to capture uncorrelated returns. “Operating within the ETF wrapper, we can execute rebalancing without incurring taxable gains in a manner that is not possible for most individuals and many institutions,” Mr. Green said.
Simplify launched its “permanent portfolio” Macro Strategy ETF in May. With a gross expense ratio of 0.75%, the ETF offers “pass through pricing” that utilizes other Simplify ETFs focused on convexity, volatility and managed futures, as well as index options.
Yet, even Mr. Green admits that there are corners of the market that are slightly out of reach. “We recognize that over-the-counter positions can become risky due to the disclosure,” he said, referring to the requirement that an active ETF must disclose its portfolio positions daily.
Aaron Filbeck, Philadelphia-based managing director and head of UniFi at the CAIA Association, acknowledges that “many traditional hedge funds are investing in less liquid markets and securities” and employ leverage to enhance returns. “In a wrapper that doesn’t mandate daily liquidity, leverage is easier to apply,” Mr. Filbeck said.
While absolute-return ETFs tend to have higher fees than the rest of the ETF market, they are still not as high as the management and incentive fees charged by most hedge funds today.
“High fees are considered a barrier to success for the end investor,” said Simplify’s Mr. Green, but in the hedge fund world, they are a sign of exclusivity. “From my perspective, I’d rather offer investors a great deal and the right structure, especially tax efficiency, and let the numbers speak for themselves.”