ETF Industry Still Driven by Flows Into Passive Investments 

ETF Industry Still Driven by Flows Into Passive Investments 

While active funds cut fees, lower-cost rivals grab the bulk of investor cash.

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Reviewed by: Lisa Barr
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Edited by: Ron Day

While active ETFs issuers cut fees to attract customers, lower-cost passive funds have remained the engine driving the exchange-traded fund industry. 

Total ETF net inflows this year through June 30 rose 3.2% to $212.9 billion, according to Morningstar Direct. The company, in another report, pegged passive ETF net inflows at $166.7 billion year to date, nearly four times that of active ETF net inflows, which pulled in $46.2 billion. 

Most of that money went to funds with the lowest expense, according to the 2023 JPMorgan Global ETF Handbook, published last month. ETFs with an expense ratio of less than or equal to 20 basis points brought in more than 80% of the total inflows between 2014 and 2023 to date, the report stated. Funds with the highest fees attracted just 4%, according to J.P. Morgan Quantitative and Derivatives Strategy and Bloomberg Finance L.P. 

“Investors tend to gravitate towards the lowest fee funds,” the handbook’s authors wrote. 

Passive ETFs Still Popular 

While active ETFs have been inching up in volume in recent years, the modest fees of passive ETFs make them the most popular choice. 

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. 

Despite active fund issuers making a play for bigger market share by cutting expense ratios, passive funds—which typically track a stock or bond index—aren’t winning over all financial advisors. 

“Even with the fees of active ETFs dropping, I still favor the investment philosophy of passive ETFs,” Angela Dorsey, CFP and founder of Dorsey Wealth Management in Torrance, California, told etf.com in an email. “Lower fees are one of the predictors of a successful outcome for an investment. This is true for both active and passive ETFs.”  

Her preference for passive ETFs over active is shared by other advisors. 

“Fees play a large part in choosing an ETF to recommend to a client. When evaluating an ETF, I look at fees and past performance,” Dorsey added. 

That percentage includes around 85% over the past year. It does not include the amount from the year that ended in May 2021, when it fell to around two-thirds, due to inflows of such segments as thematic and ESG ETFs, which command higher fees. 

 

Follow Michelle Lodge on Twitter @lodgemich 

Michelle Lodge is a journalist who is a contributor to many sites: Fortune, Money, Time, Barron’s, Investopedia, CNBC.com and Bloomberg.com.