Behind Active ETFs’ Small Victories

May 20, 2019

The ETF market is predominantly the realm of passive management. About 90% of all ETFs are passively managed, and together, they command 98% of all U.S.-listed ETF assets—more than $3.5 trillion.

This dominance just doesn’t budge, year after year. But in the past 12 months, actively managed ETFs have claimed some small victories.

First, the segment pulled in roughly $24 billion in fresh net asset flows in one year (as of May), according to our data. That may not seem like much compared to the $257 billion-plus passive ETFs attracted, but it represents a 32% growth rate in the asset base tied to active ETFs. That’s nearly five times the percentage growth passive ETFs saw in the same period. Today the 234 actively managed ETFs in the market command north of $77 billion in total assets.

What’s working? Broadly, most of the success in active ETFs has centered in one asset class: fixed income.

Bond markets are known for being inefficient, difficult to access and often illiquid—the perfect playground for good active managers to add value.

About $60 billion sits in active fixed income strategies as of early May, the bulk of all the assets in the segment. Of the 10 largest actively managed ETFs today, nine are fixed income strategies. This is a space where active has done really well.

(Table below plots 12-month asset flows into active ETFs through May 2019.)


Active Funds By Asset Class

  Net Flows ($M) AUM ($M) % of AUM
U.S. Equity 1,359.24 5,901.84 23.03%
International Equity 953.52 5,601.89 17.02%
U.S. Fixed Income 18,086.58 38,050.03 47.53%
International Fixed Income 3,142.93 22,269.67 14.11%
Commodities  851.55 2,245.22 37.93%
Leveraged 23.26 26.60 87.42%
Inverse 22.60 142.08 15.91%
Asset Allocation 399.81 1,990.08 -5.97%
Alternatives 118.87 905.38 12.98%
Total: 24,438.34 77,132.80 31.68%


More specifically, however, in the past 12 months, the apparent pickup in investor demand for active ETFs can be explained by two trends.

When Active Is The Only Option

The first trend is about access. Some of the most popular active ETFs in the past year are, in many cases, the only ETFs investors have to access some parts of the market.

In other words, these strategies have no real competition in the passive space. We are talking about fixed income ETFs that serve as money market fund proxies.

In 2018, the PIMCO Enhanced Short Maturity Active ETF (MINT) picked up $4.2 billion in net creations. MINT, which aims to deliver higher current income than the average money market mutual fund by investing in a diverse mix of high-quality, ultra-short-term bonds, has $11.8 billion in total assets.

The competing JPMorgan Ultra-Short Income ETF (JPST) pulled in $6 billion in the same period, rising to the No. 2 spot in the ranking of biggest active ETFs, with roughly $7 billion in total assets. The iShares Short Maturity Bond ETF (NEAR) saw $2.5 billion in net inflows in 2018, and today boasts $6.2 billion in total assets.

Flattening Curve

These active money-marketlike ETFs have benefited from massive investor demand in 2018 tied to the flattening of the Treasury yield curve. However, this demand for cashlike active ETFs may not have been about conviction on active management per se, but more about necessity—this is a segment of the fixed income market where passive strategies are hard to find.

“It would be very difficult to manage a money market index—and track it—with paper disappearing every few days,” said FactSet Director of Research Elisabeth Kashner. Active management, in this case, is a solution to a problem, and therefore, it’s found a strong following.

“Virtually all the products in this space are actively managed,” she added. “What you're looking at in this instance is not so much a flight to active management as a flight to cash in the ETF format.”

MINT is today the biggest active ETF. JPST, NEAR and the First Trust Enhanced Short Maturity ETF (FTSM) all follow at the top. These four funds command almost $30 billion.

“In my book, it’s hard to claim that as an outright victory for active management, because if there's no passive alternative in this space, what do you do?” Kashner said.

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