Passive Vs. Active ETFs: The Winner Is…
While passive exchanged-traded fund (ETF) and mutual fund assets may eclipse active ETF and mutual fund assets by early 2024, their growth pace appears to be ebbing as other investment products gain market share, according to research firm Cerulli Associates.
Separately managed accounts, money market funds, and alternative assets have eroded the market share of actively managed products. According to the firm’s research – U.S. Product Development 2023: Resource Reallocation Through Product Rationalization -, they also provide an alternative to passive funds for some investors.
“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.”
“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.
According to Cerulli, 36% of issuers intend to convert one or more mutual funds to ETFs during the next year.
A recent Morgan Stanley report echoed the popularity of active ETFs, citing targeted exposure and tax-efficient benefits.
“There are strong inflows into actively managed ETFs, and we’re seeing investor demand for strategy-specific and tax-efficient ETFs that are run with institutional capabilities in an uncertain market,” said Anthony Rochte, Morgan Stanley’s Global Head of ETFs.
According to Morgan Stanley, which cited Morningstar statistics, active ETFs represented $444 billion in assets in October, nearly 3x the amount in active ETFs in October 2020. The investment bank also noted data from etf.com that there are currently 1,255 active ETFs traded on U.S. markets, up from around 350 in 2019.
While they still make up a small portion of the more than $7 trillion ETF market, actively managed ETFs expanded at a 14% annual pace in the first half of 2023, compared to a 3% annual growth rate for passive ETFs.
The largest active fund is the JPMorgan Equity Premium Income ETF (JEPI), which has assets worth slightly more than $30 billion.