After a fresh torrent of inflows, actively run exchange-traded funds look poised for a record-breaking $260 billion haul this year as investors go beyond traditional benchmarks to ride alternative strategies, from selling options to riding cheap quant trades.
Portfolio managers have poured money into the active sector for 50 consecutive months after a $22 billion allocation in May, data compiled by Bloomberg Intelligence show. With that momentum, State Street, the third-largest ETF manager, predicts flows into actively run ETFs may be almost double last year's record $140 billion tally. And Morningstar Direct sees the total number of such ETF offerings surpassing passive ones in the next three to five years.
So while the exchange-traded fund boom has garnered a reputation as nothing more than simple index-tracking flows, the latest data underscores the industry's evolution beyond its passive fame.
"This pace is unlike anything we have seen," Matthew Bartolini, head of SPDR Americas research at State Street Global Advisors, which oversees about $1.3 trillion in ETF assets, wrote in a recent note to clients. Investors are turning to active ETFs for returns that outpace benchmarks and also to target specific market outcomes based on risk tolerance, he said.
It's early days. While active funds have raked in roughly $107 billion this year, or 32% of all ETF flows, they still amount to only 7% of the roughly $9 trillion in total ETF assets, BI data show. But as investors big and small seek portfolio diversification, actively managed vehicles are expected to gain fresh traction.
The assets aren't necessarily flowing to traditional bond- and stockpickers. Firms such as Dimensional Fund Advisors — the largest active ETF issuer — and JPMorgan Asset Management are leading the charge, accounting for almost 40% of total active ETF assets. The former is known for its systematic funds, while JPMorgan has lured cash with offerings such as ETFs that use options overlay strategies to generate extra yield.
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"Over the past four years, we have seen some of the strongest innovation in active management take place in ETFs, particularly across equity and equity-income strategies," said Amrita Nandakumar, president of Vident Investment Advisory. "I do not see that slowing down."
The catalyst for the sea change came in 2019 when the U.S. securities regulator approved a
This year, 168 actively managed ETFs have hit the market, compared to 68 passive offerings, BI data show. Active debuts have been more numerous each year since 2020. Last year in particular saw a slew of launches of single-stock ETFs and so-called buffer ETFs, which are intended to offer downside protection.
"With the passive side of the fence already crowded, it's only natural that we've seen active ETFs begin to proliferate," said Ben Johnson, head of client solutions at Morningstar.
If regulators approve the so-called Vanguard patent that would allow an ETF to be listed as a share class of a broader mutual fund — boosting the tax efficiency of the investment vehicle — that would open the floodgates to a fresh crop of active ETFs, Johnson said. For now, there are over 2,000 passive ETFs in the market, around 500 more than active choices.
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Of course, there are active ETFs offering the traditional approach of picking stocks and bonds.
An example is the $1.6 billion T. Rowe Price Capital Appreciation Equity ETF (ticker TCAF), which launched in June 2023 and is overseen by portfolio manager David Giroux. The fund, which invests primarily in large U.S. companies such as Microsoft and Nvidia , has seen consecutive monthly inflows since its inception.
"Some investors want someone managing their funds despite the higher fee — if they believe in the manager — rather than a set-it-and forget-it approach, at a minimal cost," said Mohit Bajaj, director of ETFs at WallachBeth Capital.
