New Launches and Model Portfolios Boost Active ETF Numbers

For the first time ever, there are more active exchange-traded funds than passive ones in the $11 trillion ETF market, according to data from Bloomberg Intelligence.

Slightly more than half (51%) of the roughly 4,300 ETFs listed in the U.S. are active funds—up from 23% in 2020. It's the latest sign that investors are stepping away from index-tracking funds in favor of ones that are managed by professionals.  

Why Active ETFs Are Growing

While active ETF launches have taken the spotlight, investors have continued to plow cash into passive ETFs—and that trend won’t stop soon, Bryan Armour, director of ETF and passive strategies research for North America at Morningstar, explained to etf.com. But the growing adoption of active ETFs “signals the ETF investor base is growing, too, as new launches and model portfolios increasingly entice mutual fund investors to join the ETF fray,” he added.  

Last year, 510 active ETFs launched (excluding those created as trading tools)—a figure that accounted for nearly 80% of all ETF launches, Morningstar data show. Meanwhile, the firm’s latest research on the model portfolio landscape found that active stock and bond ETFs are the top products that model providers expect to include in their models over the next 36 months, and nearly half of the models already owned at least one active ETF as of the end of March.

Another factor driving the growth of ETF listings is that managers can charge higher fees: The asset-weighted expense ratio for an active ETF in the U.S. is 0.4% versus 0.14% for an index ETF (excluding leveraged and inverse products), Aniket Ullal, head of ETF research at CFRA, told etf.com.

Established asset managers also dominate the indexed space, whereas there is competitive "whitespace" available in active, Ullal added. Plus, there’s a demand from investors who have traditionally invested in mutual funds from specific managers but are now eyeing the more tax-efficient, liquid and transparent wrapper. 

A Caveat 

Active ETFs now outnumber passive ones, but not in the traditional sense, Armour said. 

“Many of these strategies are systematic but don’t track indexes, rather than typical stockpickers or other discretionary active funds,” he said. “For example, defined outcome ETFs reset their options exposure once a year and follow the same process each time, yet they count as active ETFs.”

Defined-outcome managers have also ballooned the active ETF count by launching monthly ETFs for multiple strategies, resulting in dozens of ETFs per issuer.