This year has been a big year for active ETFs! According to Morningstar, even though actively managed ETFs still only represent 7% of ETF assets, they accounted for 25% of the flows in the first half of this year, growing to a record $889 billion from their start of the year, $714 billion.
Among the firms having the greatest active ETF inflows are JP Morgan, Dimensional, BlackRock, Capital Group, and American Century. In fact, Capital Group just launched seven new active ETFs at the end of June, bringing its total to 21 ETFs. Clearly, many active managers are embracing the ETF wrapper.
But what about among thematic ETFs? Who is winning there from a performance and flow standpoint?
The ARK Story: Active Thematic Pioneers
ARK Invest, led by its CIO and Portfolio Manager, Cathie Wood, was one of the first firms to launch active thematic ETFs in 2014. Today, the firm manages six actively managed thematic ETFs, which have accumulated more than $11.6 billion in assets, including its flagship ARK Innovation Fund (ARKK ), which has $6.4 billion.
While these asset levels are not at their Q1 2021 peak due to performance issues and increased competition, there is no disputing ARK’s success as pioneers in the active thematic space. They were the first funds to embrace transparency, which other active managers avoided due to trading considerations. They leveraged holding transparency to help tell their story and demonstrate their research expertise.
Other Top Active Thematic Managers
Another successful active thematic product is Amplify’s Transformational Data Sharing ETF (BLOK ), the first and largest actively managed blockchain ETF. When the ETF launched back on 1/17/18, regulators were not comfortable using the term “blockchain,” hence the legacy naming convention. The ETF currently has $757 million in assets and invests in the companies actively involved in developing and utilizing blockchain technology. It also has direct exposure to crypto via the use of crypto ETFs. The BLOK ETF is up 29.9% YTD and has earned over 133% cumulative total return since its inception, or 13.9% annually.
AdvisorShares is an active ETF white-label platform that has had success with its active thematic ETFs. Its largest active thematic fund is the AdvisorShares Pure US Cannabis ETF (MSOS ), which holds $945 million in assets. While performance has been a mixed bag for cannabis investors, active ETFs like MSOS can provide thematic exposure to the multi-state operators (MSOs) to get around federal legality via swap options. Amplify’s Seymour Cannabis ETF (CNBS ) is another example of an active cannabis fund providing cannabis exposure to MSOs via swaps.
Tema is a new thematic ETF issuer specializing in active thematics. Their largest active thematic ETF is American Reshoring (RSHO ), with $89 million in assets, a play on the nearshoring trend I wrote about here. It is followed by HRTS, the GLP-1, Obesity, and Cardiometabolic ETF, with $80.6 million.
Large active ETF issuers such as Fidelity, TCW, Goldman Sachs, and First Trust have also launched successful active versions of thematic products as well, leveraging their active management expertise in the ETF wrapper.
Active vs. Passive in Thematics
So, is it better to own an active or passive thematic ETF? Several aspects to consider include cost, performance, diversification benefits, and the nature of the theme itself.
Actively managed ETFs offer the opportunity to add additional skill and insights in specialized thematic segments of the market, such as blockchain. However, that additional expertise typically comes with a higher associated expense ratio relative to passive peers. Ideally, those higher costs are offset by better performance, but of course, that is not always the case. Active thematic ETFs tend to be more concentrated and have higher conviction, often at the sacrifice of risk diversification.
Passive thematic ETFs typically have lower costs but are still higher than their broad market peers like Invesco’s QQQ Trust (QQQ ), which has an expense ratio of only 20 bps. Passive thematic ETFs offer broad exposure to a theme instead of trying to “cherry pick” the best companies. Owing a passively managed basket of names in a theme can offer better diversification and may be preferable for themes where there is less stock-level differentiation. Passive ETFs can be custom-weighted to best capture a theme. Overall, passive thematic ETFs tend to be cheaper and still quite competitive regarding investment performance.
The good news is, whether selecting actively or passively managed versions of investment themes, investors now have many more actively managed options from which to choose. This allows investors to choose the thematic implementations that best suit the theme and their end investment goals.
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