Actively managed ETFs represented less than 10% of U.S. assets but gathered approximately 30% of the industry’s flows this year, as of August. This is more than triple the market share achieved during 2021, when ETFs gathered more than $900 billion, the current record.
As impressive as the demand has been, the supply has been even stronger. According to JPMorgan Asset Management’s Guide to ETFs, there have been 1,311 actively managed ETFs launched since 2019. This is 70% of the product development. In 2019, the regulations changed making it easier and faster to bring active ETFs to market.
Are Asset Managers Wrong to Focus on Active?
In short, no. The slightly longer answer is no because they have expertise to meet advisors and investors where they are with approaches that are favored.
Last week, VettaFi hosted a virtual Q4 Equity Symposium with more than 360 attendees. During the event, we asked the audience many questions. One was, “What percentage of your equity exposure is tied to active management?” The responses surprised us at VettaFi.
While 30% have less than a quarter of equity exposure tied to active, a whopping 46% have more than half. We believe much of this remains in active mutual funds and is not yet in ETFs.
A reminder that, despite strong net inflows in recent years for ETFs, more people gain equity exposure through mutual funds. The mutual fund industry is more than double the size.
Different Ways to Approach ETF Market
Many of the actively managed equity ETFs brought to market in the last five years have come from well-established firms. Some have leveraged their mutual fund franchises, some have converted products into ETFs, and others have tapped in-house experts to run new strategies.
The Fidelity Blue Chip Growth ETF (FBCG ) and the T. Rowe Price US Equity Research ETF (TSPA ) are a few examples of ETFs essentially replicating proven and widely held mutual funds. While there has been persistent concerns that their semitransparent ETF approach is dying, the data suggests otherwise. FBCG and TSPA have been popular among active ETFs, currently managing $2 billion and $920 million, respectively. They were up more than 20% for the year, outperforming the S&P 500 Index.
Becoming an ETF Overnight
While Dimensional Funds Advisors was not the first to convert mutual funds to ETFs, they have used the approach successfully. In June 2021, they converted four funds, including the Dimensional U.S Equity Market ETF (DFUS ). This fund has continued to gain momentum, pulling in $2 billion in the past 12 months. It now manages $11 billion.
In June 2023, JPMorgan converted four mutual funds into ETFs, including the JPMorgan Equity Focus ETF (JPEF ). The fund added $240 million in the past six months and now manages $820 million. Not all mutual funds that were converted into ETFs have experienced the same demand.
Both Dimensional Funds and JPMorgan have also had success with newly formed active ETFs. They recently had $157 billion and $110 billion in active ETFs, respectively.
Tapping Into In-House Expertise
Jim Lovelace and Chris Buchbinder have only two years as co-managers of the Capital Group Dividend Value ETF (CGDV ). But they have 42 and 28 years of experience, respectively, working at Capital Group. This includes co-managing widely held mutual funds like the American Funds Growth Fund of America and the American Funds Capital Income Builder. Lovelace and Buchbinder are part of a multimanager, high-conviction team running the $11 billion CGDV that launched in early 2022. The ETF is not a replication of any mutual fund, but it has grown by leveraging the firm’s expertise in equity income.
The BlackRock Large Cap Value ETF (BLCV ) launched in May 2023 and remains small, with approximately $10 million. However, the fund’s co-managers include Tony DeSpirito and David Zhao, who also managed the BlackRock Equity Dividend Fund, a $19 billion, Morningstar four-star rated, mutual fund.
Room For Further Growth
VettaFi believes there is room for further asset growth by active ETFs, but it will require education. Many mutual fund shareholders likely do not appreciate the nuances of active ETFs or even know there are such alternatives. While some investors will likely stay loyal to what they own, we stand ready to help raise awareness to aid them in making informed decisions.
For more news, information, and analysis, visit VettaFi | ETFDB.
