Investors Embrace Active ETFs, Shun Stock Picking

With asset managers launching a record number of actively managed exchange-traded funds this year, one may think traditional stock picking has returned.

Not so fast, according to a new report from Bloomberg. 

About 75% of all U.S. ETF launches this year have been active funds, which is a record percentage, according to data from Morningstar Direct. Active ETFs have also received more than one-fifth of all inflows, also a record, based on the Bloomberg report by analysts Eric Balchunas and Andre Yapp. 

Despite the cash investors and fund shops have lavished on active ETFs, the report says that this doesn’t mean a new dawn for stock pickers or for active management has arrived. Active mutual funds have been losing the same or more assets than active ETFs have been gaining; at the same time many ETFs raking in cash aren’t traditional stock-picking funds that seek to outperform the market, according to the report titled "Active Is Back; Stock Picking Not So Much."

“Active ETFs are punching well above their weight this year in terms of flows and launches, but much of the organic growth isn't going toward traditional stock pickers,” the Bloomberg report stated. 

DFA Conversions 

According to the report, Dimensional Fund Advisors is the fastest-growing active ETF Issuer in terms of absolute dollar amount, with one-year flows of $31.7 billion. DFA was an enthusiastic early adopter of ETF-to-mutual-fund conversions, and now offers a line active mutual-fund strategies in low-cost ETF form. DFA’s inflows have coincided with outflows from active mutual funds. 

Balchunas and Yapp said in the report that, “a big chunk of the flows are likely just a migration from the mutual funds to the cheaper and more tax-efficient ETF wrapper.” 

More Options ETFs 

The report also calls out the boom in active options ETFs. The largest active ETF, the $28.89 billion JPMorgan Equity Premium Income ETF (JEPI), generates income using an options strategy.  

Besides income, defined outcome ETFs, also called buffer ETFs, use options to trade gains in the market for downside protection. Balchunas and Yapp said that buffer ETFs received more than $10 billion in inflows this year alone. 

“Both styles show that active's future may lie more with packaged trades and solution-oriented strategies,” the report concluded. 

Contact Gabe Alpert at [email protected]