Active ETFs Drive Growth as Issuers Shift Focus

Active ETFs captured 30% of industry flows in the first half of 2024 while representing just 7% of total assets, according to a new report from Cerulli Associates.

The surge in active ETF adoption comes as 91% of ETF issuers report they are currently developing or planning to develop transparent active ETF products, compared to just 26% focusing on passive ETFs, the report found.

The transformation reflects investors’ growing appetite for active strategies in an ETF wrapper, combining the potential for benchmark-beating returns, with the lower cost and tax efficiency ETFs are known for.

ETF providers are racing to meet demand, with 59% currently developing or planning dual share class products that would allow investors to choose between mutual fund and ETF versions of the same strategy, according to Cerulli’s research.

Active Management Takes Center Stage

Fixed income remains a key area of focus, with 62% of polled ETF issuers reporting U.S. taxable fixed-income ETFs as a primary focus—more than any other category, the research found.

However, Cerulli identified a notable disconnect between providers and advisors regarding fixed income demands. The report shows a 40-point gap exists between ETF issuers (56%) and advisors (16%) in perceived unmet demand for U.S. fixed income products.

Asset allocation models are playing a growing role, with ETF issuers reporting 24% of their ETF assets are now model directed, according to the report.

The alternative investment landscape within the ETF space has also evolved. While commodities and real estate ETFs made up 65% of alternative category ETFs in 2019, that portion dropped to about 37% by the second quarter of 2024, according to the report.

“While not a perfect replacement to illiquid private capital exposures, an ETF could be exactly the thing for a cohort of financial advisors looking to initiate use of true alternative investments exposures with greater operational ease,” Daniil Shapiro, product development director at Cerulli, said in the report.