Active ETFs have come on in leaps and bounds in recent years since the ETF rule’s onset in 2019. In the years since, ETFs have grown in popularity, with the active funds contributing significantly to the rate of new launches. Many investors are increasingly looking to active ETFs for their key advantages over passive mutual funds and other ETFs, with one key, underrated trend this year set to turbocharge the active side of the ETF space.
See more: Rising Active ETF TCAF Hits $2 Billion in AUM
Much has been written about the potential impact of rate cuts this fall, which would boost equities, including active funds. Comparatively little discussion, however, has focused on a key sleeper trend in active: mergers and acquisitions (M&A).
Active ETFs, M&A, and You
New analysis from T. Rowe Price Associate Portfolio Manager Dante Pearson cites a few key factors driving a recovery in M&A, which could disproportionately benefit active ETFs.
For starters, following two years of steady M&A volume decreases leading up to 2023, pent-up demand may finally be emerging. Fatigue among managers, who have had to navigate significant turmoil since the COVID-19 pandemic’s onset, could also contribute. Finally, Pearson notes, a brighter economic outlook could also be setting the stage for deals.
Citing data from Bloomberg Finance L.P., the piece points to a 23% increase in M&A volume this year following two back-to-back down years. So, why might a recovery in M&A boost active ETFs over other passive funds?
M&A activity can benefit some firms and harm the valuations of others. While dealmakers hope that an acquisition will boost the prospects of the post-merger firm, it doesn’t necessarily happen overnight. Active ETF managers who can leverage fundamental research about a given firm, rather than just own it because it’s in an index, can sift through candidates for deals to better understand which presents the best opportunities. An actively managed ETF can over or underweight firms based on that information.
What’s more, actively managed ETFs already have some key advantages over mutual funds and their passive ETF siblings. ETFs incur fewer taxable events than mutual funds, while active investing can help the strategies outdo their passive ETF peers. With an uncertain but positive economic environment now seeing more M&A activity, investors may want to take a closer look.
For example, a fund like the T. Rowe Price Capital Appreciation Equity ETF (TCAF ) might present a notable option. The fund has gathered significant AUM in just over a year of operation, managed by David Giroux.
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