Passive ETF Growth May Be Slowing: Cerulli

Passively managed ETFs and mutual funds reached 49% of market share in the second quarter.

While passive ETF and mutual fund assets may overtake active ETF and mutual fund assets by early 2024, their growth rate appears to be slowing as other investment products grab market share, a new report by research firm Cerulli Associates says.

Separately managed accounts, money-market funds, and alternative assets have taken share away from actively managed products. They also are offering an alternative for some investors to passive funds, according to the firm’s report "U.S. Product Development 2023: Resource Reallocation Through Product Rationalization."  

“Asset managers believe that demand for active management increases with economic uncertainty and with factors that drive poor market performance,” wrote Matt Apkarian, a member of Cerulli's product-development practice and lead author of the report. "Conflicting patterns have been seen during the beginning of the current decade."

Active ETFs 

Although active funds represent a small portion of the overall ETF market—they hold about $502 billion in assets, according to etf.com data, a fraction of the $7 trillion held in all U.S. ETFs—their numbers are growing. About 1,300 active ETFs trade in the U.S., according to etf.com data.

Still, they are growing as many investors look to them as an alternative to traditional mutual funds. Their performance may be improving, too—Morningstar found that 57% of active ETFs outperformed their mutual fund counterparts in the year through June 2023. The largest active fund is the JPMorgan Equity Premium Income ETF (JEPI), which has just above $30 billion in assets.  

“Time will tell where the critical point exists upon which passive investing becomes a risk, where the mechanism of blindly buying securities based on their prices rather than their cash flow could blow back,” Apkarian said, in a statement.  

More than a third of issuers, 36%, say they have plans to convert one or more mutual funds to ETFs in the next year, according to Cerulli.  

Contact Lucy Brewster at [email protected].