The active ETF space could provide the next growth phase in the exchange-traded funds industry, a new report says.

SEI’s Strategy Brief: Active ETFs report, produced in collaboration with ETF Trends, says that it would be a “mistake to pigeonhole ETFs solely as index trackers,” and that the sector could be on its way to competing with mutual funds for market share.

The active ETF sector consists of 56 products and $12.6 billion in AuM, as of March 13, 2013. The broader sector - of active and passive funds and exchange-traded notes - makes up 1,443 US-listed products with $1.46 trillion in assets.

In the US, there are 952 ETFs in registration with the SEC, including approximately 40 actively-managed ETFs which are either in registration or have received approval but have yet to come to market.

This indicates there is more to come from the active managers – but some are predicting quite substantial growth in the coming years. Pooneh Baghai, co-leader of McKinsey's Americas wealth management, asset management and retirement practice, predicts that these products will account for $500 billion in assets under management by 2020, up from $12.6 billion today.

One of the most famous examples of an actively-managed ETF is PIMCO’s Total Return Bond Bond ETF, which it launched as an adaptation of its renowned mutual fund of the same name, and which has garnered over $4 billion since its 2012 launch.

Active ETFs are more expensive than their passive counterparts, however, as they are not based on an underlying index. Of the 56 actively managed ETFs in existence, the average expense ratio is 1 per cent, compared to a 0.61 per cent average expense ratio for all ETPs (passive and active), the report said.

One of the difficulties around actively-managed ETFs is that, unlike mutual funds, daily disclosure of the underlying securities is required – potentially allowing investors to create their own portfolios using the manager’s research and knowledge, but without paying the fee.

“While the active ETFs currently available have provided full transparency, many of those providers seeking to launch new actively managed ETFs are trying to find ways to work around the transparency rules and limit their disclosures of holdings,” says SEI.

Firms innovating in this area in various ways include Eaton Vance, BlackRock, Guggenheim Investments and Vanguard, the report said.  

In another development, the report highlights that the SEC has lifted its moratorium on the creation of leveraged or actively-managed ETFs using derivatives, allowing portfolio managers to create products which use futures, options and swaps in strategies.

This change in position from the SEC will allow managers to exploit perceived market inefficiencies and will likely increase the number of active ETF launches, the report predicts. A number of managers, such as T Rowe Price, Fidelity Investments, Franklin Resources, Janus Capital Group and Columbia Management Investment Advisers, are working through exemptive relief with the SEC to launch actively-managed products, it says.