Active ETFs Punching Above Their Weight in Flows

Actively managed exchange-traded funds landed nearly one-third of all new ETF money so far this year, a near-doubling of their market share, as declining prices draw in more investors. 

The surge comes despite evidence showing that active funds, which are more expensive because they pay a manager to beat the market, are largely unable to beat markets. 

Thirty percent of fund flows so far this year have gone into active ETFs, which make up only 6% of total ETF assets, according to data from Bloomberg. That’s up from 17.5% of flows through the same period last year, according to Deborah Fuhr of ETFGI. 

Most of the new money went into active equity ETFs; despite making up less than 5% of total assets under management, actively managed funds received 56% of 2023 flows.  

Among fixed income ETFs, actively managed funds make up about 10% of both assets under management and year-to-date flows. This is similarly reflected in ETF launches, according to Bloomberg ETF analyst James Seyffart, about two-thirds of ETF launches since the beginning of 2022 have been actively managed funds.  

Price Cuts 

Active funds are getting cheaper and drawing in customers, Eric Balchunas, senior ETF analyst for Bloomberg, said during a June 14 panel. While active ETFs with expense ratios of 0.40% or lower make up about one-quarter of total ETF products, they have grabbed two-thirds of assets under management and 90% of recent flows.  

“Even ... Vanguard’s index fund didn’t get really popular until it lowered its fees,” Balchunas said. 

Also pushing active funds growth is that the average number of holdings in ETFs is dropping. Balchunas explained that investors get exposure to the market as a whole basically for free with index funds. Therefore, if investors are going to pay a premium for active funds, they want one focusing on taking bigger bets on fewer stocks that differs more from overall markets, he said. 

Despite evident investor enthusiasm, few actively managed funds beat their benchmarks after fees. Most underperformed the S&P 500’s 18% drop last year, according to S&P Global.  

Long term, things are even worse for active funds, S&P’s Spiva Scorecard says. In the 20-year period through December, out of all domestic stock funds, just over 3% outperformed their benchmarks. For global stock funds, it was just over 10%. Bond funds did better, with just over 30% outperforming.  

Balchunas summed it up saying that the “active world is underperforming, that’ll be true for the foreseeable future,” though he went on to include the caveat that “there are some exceptions.” 

Contact Gabe Alpert at [email protected]