Active ETFs Gain Appeal Amid Volatility

As the bull market for stocks starts looking long in the tooth, and inflation, interest rates and growing geopolitical unrest boost market volatility, investors and financial advisors are leaning more heavily on actively managed ETFs in typical late-cycle fashion.

During the year's first three months, $60 billion, or 30%, of all ETF flows went into actively managed exchange-traded funds, according to a recent Fidelity Investments report. Active ETFs punched above their weight class, since they account for just 7% of total ETF assets.

“One of last year’s burgeoning trends was the increasing prevalence of actively managed ETFs,” the report stated.

That trend carried into the first quarter of this year with active ETFs representing 90 of the 138 ETFs launched so far this year, according to Fidelity’s research.

Passive indexed strategies still dominate ETF flows, with $132 billion worth of net flows into indexed ETFs during the quarter.

Chris Shuba, chief executive and founder of Helios Quantitative Research in Granite City, Calif., said diversification is moving front and center with financial advisors, especially after the past few years of seeing a handful of stocks dominate many of the broad market indexes.

“I believe the Mag Seven, as a group, are a strong representation of innovation and potential in the technology and near-technology space,” he said. “I wouldn't argue to completely divest from the Mag Seven, but diversification could be very beneficial at this stage.”

Among the largest actively managed ETFs, the$32.6 billion JPMorgan Equity Premium Income ETF (JEPI) brought in $1.64 billion during the quarter, according to etf.com data. The $11.9 billion JPMorgan Nasdaq Equity Premium Income ETF (JEPQ) brought in $2.57 billion. 

While the growing trend toward active management is a popular move when the broad markets start slipping, Fidelity’s research shows some investors are still following familiar patterns.

For example, of the roughly $200 billion of inflows into U.S. ETFs during the first three months of the year, more than half of those net flows went into U.S. equity funds.

Beneath the flows into indexes, the research shows technology-focused ETFs leading all sectors in terms of net flows at $9.5 billion, while utility sector ETFs led on the other end with $2.3 billion worth of net outflows.

John Khoury, senior wealth manager at Savvy Advisors in Boson, views the money in motion as a prudent strategy for avoiding letting portfolios become too “top heavy.”

“It’s important to rebalance portfolios that have become over-exposed to stocks relative to bonds, cash, and alternative investments given the strong stock market performance over the last year,” he said. “Although bonds aren’t as exciting as stocks, they do offer attractive yields that can help reduce volatility and risk for an investor’s portfolio, especially for investors close to retirement or in-retirement.”