Active ETFs Risk Closure on Weak Performance: Survey

Nearly half of active equity ETFs face closure as they underperform and don't generate enough fee revenue to cover basic operating costs, according to Morningstar’s Q4 2024 Markets Observer report.

Dozens of active ETFs may not generate the estimated $250,000 in annual operating expenses required to maintain an exchange-traded fund, according to the report, which pointedly excluded "systematic strategies from firms like Dimensional and American Century’s Avantis." U.S. exchanges list 1,571 active ETFs with $754.3 billion in assets, according to etf.com data.

The long-term outlook for individual funds arises as investors pour money into more-expensive active ETFs in an effort to beat the performance of broad markets. Globally, total assets hit $1 trillion at the end of September after $240 billion of inflows up to that point this year, ETFGI reported. Companies issued 557 funds globally this year through September's end, ETFGI reported, as U.S. total ETF assets surpassed $10 trillion.

Read More: U.S. ETFs Hit $10T in Assets on Market Gains, Inflows

“Exchange-traded funds represent a massive opportunity for active mutual fund managers, but not all will see sustained success,” the report notes, highlighting why investors need to carefully evaluate both an ETFs strategy and its provider’s ability to maintain the product long term.

Active ETFs Need Scale to Survive

Among active equity ETF providers, Capital Group leads fee generation with an estimated $64 million in trailing 12-month fees, followed by JPMorgan at $44 million and Fidelity at $38 million, the report found.

However, these top performers represent a small fraction of the active ETF landscape, with many smaller providers struggling to achieve sustainable scale, according to Morningstar’s analysis.

The report noted that innovations in active ETFs, cryptocurrency products and options-based strategies have sparked renewed interest from both investors and providers, even as sustainability concerns linger.

Traditional mutual fund managers continue viewing ETFs as a key growth opportunity, with the report showing established asset managers launching new active ETF products even amid the competitive landscape.

Fee pressure remains a critical factor, with providers needing to balance competitive pricing against the necessity of generating sufficient revenue to maintain operations, according to the analysis.

“Active managers have less to show over longer periods,” Morningstar’s analysis found, nothing that many smaller ETF providers struggle to generate the revenue needed to maintain operations in the competitive marketplace.