Actively Managed ETFs Claim Outsized Portion of 2023 Inflows

Active ETFs are having a strong start during the first several weeks of 2023, pulling in a total of $16.8 billion through Feb. 22—a trend that is likely to continue this year, according to market analysts. About 48% of actively managed ETFs had positive inflows compared to roughly 45% of passively managed ETFs.  

“The growth in active ETFs likely represents a concerted distribution push by firms with the ability to grow ETF assets due to their existing mutual fund or wealth management franchises,” said Aniket Ullal, head of ETF data & analytics at CFRA. “It shows that investors that have existing relationships or trust in these firms are willing to migrate their relationship over to these new ETF vehicles.” 

Actively managed ETFs currently represent roughly one-third of all ETFs, with $396 billion in assets under management, but they are a small fraction of the $6.9 trillion in total assets invested in U.S.-listed ETFs. 

Launches of active ETFs have been elevated since the passage of the ETF Rule, which allows for—among other innovations—custom baskets for actively managed ETFs, which can greatly increase their tax efficiency. 

“The ETF wrapper has had globally 44 months of consecutive net inflows. There are a lot of investors out there that like ETFs and like the fact that active strategies are now available in an ETF wrapper,” Deborah Fuhr, founder and managing partner of research firm ETFGI, told ETF.com. 

Of the top 100 ETFs in terms of flows year to date, only 12 are actively managed funds, but one in particular stands out. The $21 billion JPMorgan Equity Premium Income ETF (JEPI), which implements a covered call options strategy, saw inflows of $3.7 billion so far this year. That’s nearly five times the inflows of the actively managed ETF with the second-largest amount of inflows, the $24.7 billion JPMorgan Ultra-Short Income ETF (JPST), which pulled in $785.5 million.  

The top 10 actively managed ETFs are a gallery of some of the best-known names in active management, including J.P. Morgan, Dimensional Fund Advisors and Fidelity. Fully half of the funds cover the fixed income space, while another two (JEPI and JEPQ) also have an income focus via their underlying covered call strategies.  

Fuhr notes that fixed income, the asset class of half of the top 10 ETFs, has often been one in which investors prefer active management. 

Pent-Up Demand

She also points out that for a firm like Dimensional, there is some pent-up demand for their products that had previously been sold only via a network of approved financial advisors. This holds true for other active managers that may not have offered ETFs until recently.  

Capital Group, which has seen positive inflows for its entire lineup of actively managed ETFs in 2023, is another example of the ETF wrapper appealing to a wider audience, Fuhr said, citing the smaller size being more convenient for getting in or out of a fund, the lower costs and the transparency as things investors tend to like.  

Fuhr sees the trend of (mainly actively managed) mutual funds converting into ETFs continuing in U.S. markets, but says the possibility of Vanguard’s share class model being adopted by more firms once the patent expires could solve the ETF problem for still other mutual fund issuers who want to launch ETFs.  

“If you have active mutual funds in a 401(k) strategy that's already out there [and] has a lot of money, it's difficult to envision getting all those investors to be happy if you were to convert into an ETF. [However,] if you were able to offer an ETF share class off of a mutual fund, that would solve the dilemma about how your existing 401(k) investors are going to feel about you moving to an ETF [structure],” Fuhr added. 

Source: ETF.com & FactSet; data as of 2/22/2023

Contact Heather Bell at [email protected]