Growth spurt: Active ETFs on the way to $500 billion

Actively managed exchange-traded funds have yet to take off with investors — with one big exception — but over the next several years, experts expect them to grow faster than their passive brethren. Pooneh Baghai, co-leader of the Americas wealth management, asset management and retirement practice at McKinsey & Co., predicts that assets in actively managed exchange-traded funds will explode to $500 billion by 2020, up from $10 billion today. “We think active ETFs have major momentum,” she said. “It's not a question of if; it's a question of when and how much.” Growth will be driven by big brands such as Fidelity Investments, T. Rowe Price Group Inc. and Franklin Resources Inc., Ms. Baghai said. The three firms, along with several others, are in various stages of getting approval from the Securities and Exchange Commission to launch active ETFs. Bill Gross and his Pacific Investment Management Co. LLC showed the power a brand can have in the active-ETF business last year with the launch of the Pimco Total Return ETF (BOND). In less than a year, the ETF has grown to more than $4 billion, and in 2012, it accounted for about 80% of the overall growth of active ETFs. Peter Quinn, president and chief operating officer at RiverFront Investment Group LLC, uses both active and passive strategies in the model portfolios his firm creates for financial advisers. He said he could see active ETFs taking the place of a mutual funds' institutional share class in fee-based accounts, where ETFs are most popular, especially if the expense ratios come down. “That may drive the phenomenon,” he said. At least one company isn't getting too excited about active ETFs just yet. Daniel Gamba, head of iShares Americas Institutional Business, said active ETFs aren't a priority right now for his company, which is the largest provider of ETFs at $556 billion in such assets. “We're taking a wait-and-see approach,” he said. “Everybody has a point of view,” Ms. Baghai said. “We'll know who's right in 10 years.”