Actively managed ETFs, particularly those of the fixed income variety, are among the fastest-growing ETF segments today. That growth has been facilitated in part by advisors moving away from higher-fee mutual funds and issuers converting popular mutual funds to the ETF wrapper, among other factors.
The groundswell of enthusiasm for active ETFs is benefiting upstarts such as the ALPS/SMITH Core Plus Bond ETF (SMTH ) and the ALPS Intermediate Municipal Bond ETF (MNBD ). In particular, SMTH is an impressive active ETF growth story. That’s because it’s home to nearly $2.2 billion in assets under management and it hasn’t even turned 2 years old yet.
The success of exchange traded funds like SMTH and MNBD is attributable to many factors. These include the ETF wrapper, active or passive, being more hospitable to investors when it comes to paying taxes. Put simply, ETFs’ creation/redemption process leaders to fewer taxable events for investors.
“Tax efficiency won’t affect pretax returns and thus success rates, but reduced trading costs should marginally improve them. The main pretax benefit of active ETFs versus mutual fund peers is their lower fees,” noted Morningstar’s Bryan Armour.
Speaking of Fees…
Among the largest drivers of the ETF revolution has been those funds’ status as often being significantly cheaper than actively managed funds. But in what’s good news for advisors and investors considering products like SMTH and MNBD, gone are the days when passive ETFs dominated the “cheap ETF” conversation. Translation: Many active ETFs are, at a minimum, much more cost-effective than comparable mutual funds.
“Investors tend to prefer cheaper funds, too. The fee paid by the average invested dollar drops to 0.40% for ETFs and 0.58% for mutual funds. From this perspective, ETFs’ fee advantage over mutual funds shrinks, but the hurdle remains lower. Active ETFs should be more competitive than the average active mutual fund,” added Armour.
As noted above, SMTH is already proving to be a growth story in its own right. And MNBD is finding its footing, too. It’s possible both ALPS exchange traded funds will continue adding assets at noteworthy levels going forward. That’s because they’re now established players in an ETF segment that’s increasingly a priority for asset allocators.
“Active managers are now racing each other to launch ETFs. Over 1,300 active ETFs have been launched since the start of 2024. Active managers’ change of heart on daily transparency largely comes down to revenue. Active ETFs are collecting inflows, while active mutual funds are bleeding outflows,” concluded Morningstar’s Armour.
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