Actively managed exchange-traded funds represent more than 60% of launches this year, yet make up only about one-third of all U.S.-listed ETFs. Launches have accelerated since 2019’s ETF Rule, which evened the playing field somewhat between actively managed and index-based funds.
Despite the uptick in launches in recent years, roughly 86% of 2022 ETF inflows—which stood at approximately $574.4 billion as of Dec. 9—went into passively managed ETFs. Actively managed launches may outnumber passively managed, but their share of the inflows is relatively small.
With less than $350 billion in assets under management for the entire category, actively managed assets represent a little more than 5% of the total assets invested in U.S.-listed ETFs. And all the assets still amount to less than assets invested in a single ETF: the $368 billion SPDR S&P 500 ETF Trust (SPY). Assets are clearly growing when 5% of funds are attracting 14% of inflows—but it’s still an uphill battle.
Challenging Active Environment
Active management has always had a tough row to hoe in the ETF industry. After all, ETFs were originally conceived of as low-cost, tax-advantaged, passively managed products.
The first actively managed ETF launched in 2008, 15 years after the first ETF, and the first true blockbuster, made its debut in 2012 when PIMCO launched what is now known as the PIMCO Active Bond ETF (BOND), which currently has $3.2 billion in assets. At the time of its launch, the fund was managed by fixed income guru Bill Gross and became one of the quickest ETFs to reach $1 billion in assets.
But blockbusters like that have been few and far between in the actively managed space. Most notably in recent years, the first ARK ETFs, which all pursue a disruptive innovation strategy designed by CEO Cathie Wood, hit the market in the last quarter of 2014 to little fanfare.
However, after the ARK Innovation ETF (ARKK) notched an annual return of more than 87% in 2017, investors started to take note. At the end of 2020, the fund had more than $18 billion in assets under management and had a return of nearly 153% for that year. Fast-forward a few more years, and ARKK has $6.6 billion in assets and has notched a -63% return so far in 2022, after falling 34% in 2021.
Even with its steep decline this year, ARKK has managed to pull in $1.4 billion in assets so far.
But most actively managed ETFs don’t have billions in assets under management. In fact, only 67 of the 999 ETFs have more than $1 billion. Meanwhile, out of all ETFs, 559 have more than $1 billion in assets. In other words, 18% of all ETFs have more than $1 billion in assets under management, while only about 7% of actively managed ETFs have more than $1 billion.
Current Active ETFs Leaders
A look at the top 10 actively managed ETFs offers an interesting snapshot of the space. JPMorgan offers the two largest actively managed ETFs, while Dimensional Fund Advisors has three funds in the top ranks, two of which converted from mutual fund structures. In terms of leading brands, Vanguard and State Street Global Advisors are rather glaring absences.
Four of the top 10 actively managed ETFs are fixed income funds targeting short-term debt, while one ETF among the top 10 is a commodity fund. Of the remaining five ETFs, which track equities, four cover the broad U.S. market, while the fifth is a global ETF, the aforementioned ARKK.
|JPST||JPMorgan Ultra-Short Income ETF||Fixed Income: U.S. - Broad Market, Broad-based Investment Grade Ultra-Short Term||0.18%||$22.76B|
|JEPI||JPMorgan Equity Premium Income ETF||Equity: U.S. - Large Cap||0.35%||$16.86B|
|DFAC||Dimensional U.S. Core Equity 2 ETF||Equity: U.S. - Total Market||0.19%||$16.30B|
|MINT||PIMCO Enhanced Short Maturity Active ETF||Fixed Income: U.S. - Broad Market, Broad-based Investment Grade Short-Term||0.36%||$9.00B|
|DFUV||Dimensional US Marketwide Value ETF||Equity: U.S. - Total Market Value||0.23%||$8.08B|
|DFAT||Dimensional U.S. Targeted Value ETF||Equity: U.S. - Extended Market Value||0.29%||$7.34B|
|FTSM||First Trust Enhanced Short Maturity ETF||Fixed Income: U.S. - Broad Market, Broad-based Short-Term||0.25%||$7.30B|
|ICSH||BlackRock Ultra Short-Term Bond ETF||Fixed Income: U.S. - Broad Market, Broad-based Investment Grade Ultra-Short Term||0.08%||$7.07B|
|ARKK||ARK Innovation ETF||Equity: Global Broad Thematic||0.75%||$6.93B|
|PDBC||Invesco Optimum Yield Diversified Commodity Strategy No K-1 ETF||Commodities: Broad Market||0.62%||$6.79B|
JP Morgan Switches 3 ETFs To Passive
Perhaps the most interesting development in the active management space this year is JPMorgan’s recently publicized decision to transition three of its actively managed ETFs to passive management.
The funds, which have all been on the market for the past four to six years, have seen lackluster inflows relative to their passively managed counterparts this year and have not offered significant outperformance.
Despite JPMorgan’s status as a mainly active fund manager, the firm has decided the three funds will adopt indexes as of February next year. The issuer’s lineup of nearly 50 ETFs already includes 21 products tracking indexes that have $33.3 billion in combined assets. The firm’s lineup of low-cost “BetaBuilders” ETFs tracking plain vanilla indexes, in particular, have gathered significant assets.
Passive Leads Closures
Of the 137 closures slated to complete this year, 72% are ETFs that track indexes. That number includes eight target-maturity bond ETFs that hit their maturities and several ETNs that also matured. A large portion were also thematic funds, with most of the rest tracking smart beta indexes. Another reason for so many passively managed ETF closures is that there are simply more of them to close.
Given the fact that it is very difficult to find new angles for passively managed ETFs to capture amid the maturity of the ETF market, it’s not surprising that actively managed ETFs have seen a spike in launches.
However, it’s also not surprising that investors seem wary of these products. More than 20 years of S&P Index Versus Active reports have demonstrated that active management rarely outperforms passive management, and it’s even more rare for a fund to achieve that outperformance consistently.
Even with the ETF Rule making it easier to launch actively managed ETFs that offer all the benefits of the ETF structure, the performance data around active management remains a headwind for such strategies.
Contact Heather Bell at [email protected]