Active ETFs Gain Appeal Across Wealth Management

Active management is gaining momentum across the ETF space as issuers capitalize on the migration of money away from mutual funds.

The growing appeal of active management, in both equity and fixed income ETFs, also coincides with a frothy point in the equity markets that historically presents opportunities for active strategies to generate alpha.

“Active ETFs have been attracting increased interest for good reason; they are generally more tax efficient and often come with lower costs than mutual funds,” said Jen Wing, chief investment officer at GeoWealth.

“I don’t see this trend slowing down anytime soon,” she added.

Ryan Jackson, senior manager research analyst at Morningstar, said 2024 has been a “tremendous year” for active ETFs, particularly for fixed income.

“About 36% of bond ETF flows streamed into active products for the year to date through October, compared with 24% for active stock ETFs,” he said.

Schwab Adds Third Active ETF to Lineup

One recent example of how ETF issuers are migrating toward active management is the filing this month by Schwab Asset Management for an actively managed Schwab Core Bond ETF, which will be just the third active ETF among Schwab’s lineup of 31 ETFs that combine for $375 billion.

Macquarie Asset Management, a U.S. subsidiary of the $610 billion Macquarie Group in Australia, entered the U.S. ETF market last November with three active strategies, and their lineup has since expanded to five active ETFs.

“We plan to continue to expand our ETF platform with solutions that can offer compelling investment outcomes and help clients meet their financial objectives,” said Anthony Caruso, Macquarie’s Head of ETF Strategy.

Caruso added that active strategies may be well suited for this point in the economic cycle that has seen the U.S. equity market largely dominated by a handful of stocks.

“We believe markets may normalize and broaden, resulting in greater dispersion among stock returns,” he said. “Investors can benefit from access to skilled active managers, in addition to diversifying across market cap and regions. We are excited about the opportunities ahead to bring our flagship active investment capabilities to the ETF market.”

Matt Kaufman, Head of ETFs at Calamos Investments, said his firm entered the ETF market 18 months ago because of all the signs pointing toward “a tremendous amount of opportunity.”

Calamos, which has $45 billion in total assets under management mostly in mutual funds, has so far rolled out 15 active ETFs that leverage the firm’s expertise in convertible bonds and alternative investments.

Citing the roughly $800 billion active ETF slice of the overall $10 trillion ETF industry, Kaufman looks at the $11 trillion in active mutual fund assets as pure potential for active ETFs.

“The mutual fund is a 100-year-old wrapper, but the first ETF wasn’t introduced until 1993,” he said, adding that active ETFs got a boost from the Securities and Exchange Commission in 2020 through the standardization of the application process for active ETFs.

If there’s anything preventing more mutual fund shops from rolling out active ETFs, Kaufman believes it might be the anticipation of an ETF mutual fund share class, which has been awaiting an SEC ruling.

“If mutual fund companies are ultimately able to do ETF share classes for their active mutual funds, why launch an ETF?” he said.

Karen Veraa-Perry, Head of U.S. iShares Fixed income Strategy at BlackRock, has a different perspective by representing an issuer that launched its first active ETF in 2013. But she still sees strong momentum behind active ETFs.

“We are seeing increased flows into active as investors are looking for ways to navigate the markets,” she said. “Active tends to do better when you have more dispersion in the markets, and in many cases the active ETF fees are lower than even the institutional share classes for mutual funds.”

Active ETFs to top $4 Trillion: BlackRock

According to BlackRock’s research, active ETFs globally are on track to top $4 trillion by 2030.

From a financial advisory perspective, Nathan Hoyt, Chief Investment Officer at Regent Peak Wealth Advisors, said the momentum behind active ETFs is apparent and growing.

“An actively managed ETF can provide tax efficiency in a slightly more cost-effective wrapper than a traditional mutual fund, but the reason you own any actively managed fund is the same; you are looking for the opportunity to beat the broad market,” he said. “As actively managed ETFs gain popularity, in a market where there are more ETFs than publicly traded companies, it’s essential to look under the hood to understand what you own.”