Asset Managers Calling for More Active ETFs as Demand Surges

Rolling out active exchange-traded funds is a top priority for nearly two-thirds of asset managers as the investment vehicle gains popularity.  

Creating new investment vehicles is a goal for roughly half of asset managers and the top asset class they have their eye on is active ETFs, according to Cerulli’s 2023 state of the industry survey that published July 11. Sixty-two percent of managers are prioritizing active funds, one of the fastest-growing corners of the ETF industry. 

While active ETFs have been around for 15 years, the vehicles have more recently picked up momentum from both retail and institutional investors as asset managers look to ETFs as a compelling alternative to mutual funds. Active funds received 23% of all net inflows to U.S.-listed ETFs through June 30, despite making up only 5.6% of assets under management, according to etf.com and Morningstar data.  

“The relative tax advantages of the vehicle, combined with increased advisor comfort with ETFs in client portfolios, make active ETFs an attractive proposition for asset managers,” Cerulli Associate Director Matt Belnap said in the survey’s press statement. 

Among the 3,200 ETFs listed in the etf.com screener, about a third, or 1,100, are active, U.S. traded funds. Despite the large numbers, their assets are relatively small, with $408.6 billion under management out of about $6.9 trillion for the entire U.S. ETF industry. The largest is the JPMorgan Equity Premium Income ETF (JEPI), which holds $27.8 billion in assets. 

Active ETFs 

Excitement levels for active ETFs among so-called sponsor firms—the firms like Morgan Stanley that provide infrastructure for advisors and have ETFs on their platforms—is a bit lower than among asset managers, the survey found.  

While their interest is growing, only 35% of sponsor firms said they were interested in adding active ETFs from outside asset managers into their platform. Instead, 69% of sponsor firms said they were most interested in adding direct index separate accounts.  

“Asset managers are putting a lot of development dollars into these active ETFs, but what was interesting to me was that it’s not exactly aligned with what the sponsor firms are looking for from a product perspective,” Belnap said in a phone interview. 

According to a variety of studies, active funds typically don’t beat so-called passive funds or the indexes they are supposed to outperform. Only a minority outperform after accounting for fees over the long term.   

Contact Lucy Brewster at [email protected]