AdvisorShares has filed for an actively managed exchange-traded fund with performance-based fees — a first in the growing ETF industry.
The AdvisorShares Focused Equity ETF (CWS) will charge 0.75% a year, with a performance fee of plus or minus 0.10 percentage points: More if the fund outperforms its benchmark, less if it underperforms. This is a relatively common practice among open-ended funds: Fidelity Contrafund, for example, uses it.
“There’s nothing wrong with it, but it puts enormous weight on the benchmark selection,” said Dave Nadig, director of exchange-traded funds at FactSet. “The benchmark becomes the whole ballgame.”
In this case, the fund’s benchmark is the 12-month performance of the large-company Standard and Poor’s 500 stock index. But the fund has leeway to invest in small and mid-cap funds, as well as other ETFs and American Depositary Receipts, which represent shares of foreign stocks.
The fund’s investment strategy is remarkably broad, although it does plan to hold its picks for at least a year and to invest at least 80% of its assets in stocks. Management describes the strategy this way in the filing:
“The Advisor may use a variety of methods for security selection and will seek to focus on firms that are fundamentally sound and have shown consistency in their financial results and high earnings quality. The Advisor may look for stocks with a strong history of sales and earnings growth, or companies that have steadily increased their earnings and dividends for several years. Often, these companies have strong operating histories with dominant position in their respective markets and proven management teams. In addition, the Advisor may invest the Fund’s assets in lesser-known companies that the Advisor believes have a unique opportunity for growth. At times, the Advisor may aim to buy certain out-of-favor stocks believed to be at prices below their intrinsic value, as measured by the Advisor.”
The fund manager is Eddy Elfenbein , founder of Crossing Wall Street, a website.
Whether or not investors will go for the fund is an open question. Actively managed ETFs haven’t been big hits with the public. And the fee structure may not be attractive. Mr. Nadig argues that if the object is to beat the S&P 500, then the fee baseline should be 0.10%, which is about what you’d pay for an S&P 500 index fund.
“Management could get a big chunk of the upside if they outperform,” he said.
And, he noted, a range of 0.65% to 0.75% is pretty high for an ETF, even for an actively managed one. “You could get a fund managed by Jeff Gundlach for less than that,” Mr. Nadig added.