Lines Blurring Between Active, Passive ETFs

Active vs. "quasi-active" smart beta may be 2023’s big contest.

Reviewed by: Aniket Ullal
Edited by: Aniket Ullal

This is the fourth and final column in a series by CFRA's Head of ETF Data and Analytics Aniket Ullal, in which he shares exclusive insights on ETF industry expectations for 2023. 

Aniket Ullal







For exchange-traded fund investors, 2022 was a year to forget.  

Of the 2,801 nonleveraged ETFs in the U.S. at the end of 2022, only 12% (349) had positive returns for the year. Ten of the 11 Global Industry Classification Standard sectors in the U.S. had negative returns, with energy being the sole bright spot. As shown in Figure 1, commodities was the only major asset class that had positive returns, with bonds and most major broad market equity indexes experiencing negative returns.  


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Source: CFRA’s ETF database; Data as of December 31, 2022.

(For a larger view, click on the image above)

‘Indexing’ and ‘Passive’ Are Not Synonymous 

With inflation in the U.S. above 6% and the Federal Reserve still in a rate-hiking cycle, the outlook for 2023 also looks uncertain. In bear markets or periods of volatility, there tends to be renewed discussion about the merits of active management over passive indexing. A lot of focus tends to be on “active” ETFs, e.g., ETFs that are not indexed and where portfolio managers make ongoing active security selection decisions. 

However, the view that investors have a binary choice between active and passive products is reductionist. The reality is that the evolution of ETFs has blurred the lines between traditional active and passive investing.  

Many of the indexed-linked ETFs launched in the last 10 –to 15 years are not truly “passive” products, i.e., they do not merely track broad, market-cap-weighted indexes. Rather, a significant part of the ETF industry’s growth has come from “smart” or “strategic” beta products, where the underlying index provides targeted exposure to specific investment factors like dividends and low volatility or to cross-sector themes like infrastructure and fintech. 

Historically, most active fund managers have focused on specific styles of investing, such as growth, value or income-oriented strategies.  

However, this type of factor-oriented investing has been increasingly dominated by index-based ETFs. Although these smart beta ETFs don’t actively pick stocks, they cannot really be considered passive products since they focus on narrow investment factors rather than broad market exposure. As we can see in Table 1, today these smart or strategic beta ETFs account for 16% of all equity ETF assets in the U.S. 


Table 1: Equity ETFs in the US: Traditional vs. Smart Beta vs. Active

TypeETF CountAssets ($M)2022 Flows ($M)
Traditional Beta6023,965,700193,442
Smart Beta904841,788126,302
Active (Non-Indexed)496162,40157,422
Grand Total2,1955,040,540405,171

Source: CFRA’s ETF database; Data as of December 31, 2022.


Smart Beta’s Big Boost 

This type of factor investing received a significant boost in 2002, since defensive factors like dividends, value and low volatility significantly outperformed the broader U.S. equity market. Figure 2 shows how ETFs representing key smart beta factors performed relative to the SPDR S&P 500 ETF Trust (SPY) in 2022.  


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Source: CFRA’s ETF database; Data as of December 31, 2022

(For a larger view, click on the image above)

Not surprisingly, this performance was accompanied by inflows into these strategies. Dividend-oriented ETFs took in $68 billion in 2022, with low volatility and high quality strategies taking in $10.6 billion and $9.6 billion, respectively.  


Table 2: Smart Beta Equity ETFs in the US by Type

Smart Beta ETF TypeETF CountAssets ($M)2022 Flows ($M)
Cross-Sector Thematic254130,6834,334
Multi Factor Equity169114,57712,048
Low Volatility2167,40910,642
Equal Weighted Size1937,2705,383
Growth/Value - Factor Weighted4128,998938
Defined Outcome17021,11611,133
Other Options Overlay1410,3025,316
Strategy – Other388,500-126
Revenue Weighted32,944901
VIX / Risk Control122,445-517
High/Low Beta61,485-55
Hedge Fund Replication112-15
Grand Total904841,788126,302

Source: CFRA’s ETF database; Data as of December 31, 2022.


Active vs. ‘Quasi-Active’ Smart Beta 

CFRA’s analysis shows that of the ETFs that filed for registration in the last quarter of 2022, over half were active (i.e., nonindexed).  

It could easily be assumed that when they launch, these ETFs will compete for assets with passive ETFs. However, in practice, this is not likely to be the case.  

Truly passive low cost ETFs like the iShares Core S&P 500 ETF (IVV), the iShares Core S&P 500 ETF (VOO), and the iShares Russell 2000 ETF (IWM), which are core holdings, have significant asset-gathering momentum that will not be impacted by the launch of active ETFs.  

In practice, if active ETFs want to grow assets, they will need to take market share from “quasi-active” smart beta ETFs. The relative success of nonindexed active funds relative to indexed “quasi-active” smart beta ETFs will be an important trend to watch in 2023. 

Aniket Ullal heads CFRA’s ETF data and analytics business. He has worked in the ETF industry since early in its development. Ullal founded First Bridge, one of the industry’s leading ETF data sets that was acquired by CFRA in 2019. Previously, he was the product head for U.S. index products at S&P Dow Jones Indices.