[Editor’s note: The following originally appeared on FactSet.com.]
ETF nerds love January, because the Inside ETFs conference brings all the issues in the ETF industry front and center. This year, the talk on the big stage was all about “smart beta,” active management and ESG (environmental, social, governance focus). But talk is not the same as action.
ETF fund flows action for January 2017 showed that only one of the hotly discussed areas is actually hot. Actively managed ETFs had a spectacular month, while “smart beta” and ESG lagged. Meanwhile, the little-discussed vanilla funds continued to gather assets and increased their dominance within the ETF landscape.
The table below shows January 2017 fund flows by investment strategy and compares flows to starting weights for each strategy. A ratio greater than 1 indicates increasing market share; below 1 indicates decreasing market share.
For a larger view, please click on the image above.
Active On The Move
January 2017 was great for active management in the ETF space. Inflows to active ETFs reached almost $1 billion: $994,118,875, to be exact. Active fixed income continues to dominate, while active equity and commodity funds also saw inflows. But the gains were concentrated in a few segments—not widely dispersed. Actively managed currency and multi-asset ETFs saw outflows.
Bank loans and master limited partnerships accounted for over 50% of the flows to actively managed ETFs. Active flows to MLP funds account for 23% of all MLP flows—a clear gain in a segment where passive management has a strong presence. Bank loans are different, because passive investing is more advanced in the U.S. market than it is globally. In fact, there are no index-tracking global bank loan ETFs. There could be—S&P does publish a global leveraged loan index—but no issuer has launched a global index-tracking leveraged loan ETF. Right now, investors who want to access global bank loans via ETFs must choose active management.
The same is true of the money-market-like ETFs. Index-tracking in the commercial paper market is hardly simple. All cash-substitute ETFs are actively managed. Together with the global bank loans, these nonindexed segments account for half of the flows to actively managed ETFs. Back these out, and what remains is utterly ordinary growth for actively managed ETFs.
It gets worse. On Feb. 1, Alpha Architect, the issuer behind four actively managed value and momentum funds, switched from active management to index-tracking, taking advantage of dual exemptive relief. That’s effectively $162 million of outflows to active strategies to kick off February.