There have been a few dominating headlines this year with regards to the exchange-traded fund (ETF) market. From the rise and drama of bitcoin ETFs to the new annuity-like buffer products, Wall Street has been busy delivering a variety of new tools for investors within the ETF wrapper. Perhaps no other headline and trend has been as exciting as the growth of active ETFs. Thanks to rules and regulations changes, 2024 could be considered the year of the active ETF.
The proof is in the data.
With a record number of monthly inflows and numerous new product launches, active ETFs have continued to dominate the conversation — and it looks like the sector is just getting started. Based on flows and new filings, the trend towards active ETFs dominating is fully at hand.
50 Straight Months
One or two months, a trend does not make. But 50? Now we are talking. For the active ETF investor movement, that’s just what they have experienced. According to data compiled by Bloomberg Intelligence, active ETFs managed to pull in another $22 billion in inflows during May — June’s data is not yet available. This now represents the fiftieth consecutive month of net new money that the active ETF structure has seen.
What’s impressive is the overall take that active ETFs have realized so far this year.
Through May, active ETFs have managed to pull in more than $107 billion in 2024. This amount represents more than 32% of all inflows for ETFs as a whole. Roughly a third of all net cash has gone to active strategies over passive ones.
That sort of impressive momentum of asset gathering has some analysts predicting that total inflows for the year could be record-breaking. Analysts at State Street now predict that the current pace of inflows will allow active ETFs to gather more than $260 billion in assets by the time the calendar flips over. This would beat 2023’s record-breaking tally of $140 billion in asset gathering for active ETFs.
Adding fuel to the fire is Morningstar’s prediction that the number of active products on the market could be more than passive ones in the next three to five years as early filing activity predicts a robust launch environment.
And there is still plenty of growth potential for active ETFs. So far, active ETFs account for just 7% of the $9 trillion in global ETF assets. There’s plenty of passive market share for active funds to take over.
A Few Fund Leaders Dominate
Active ETFs are actually pretty old when it comes to their history. But it wasn’t until recently that they caught the eye of Wall Street and investors. Thanks to a series of rules changes at the SEC and holdings reporting requirements, active ETFs have finally started to come into their own. With managers now being able to hide their holdings and methodologies, using an ETF makes sense — tax savings are increased and front-running is reduced.
It’s a match made in heaven for investors and managers. With that, Wall Street has launched hundreds of new active ETFs for investors. All in all, active ETFs now sit at over $630 billion in assets. This chart from Morningstar shows the trajectory of funds and assets.
Source: Morningstar
But not all inflows have been even. In fact, only a handful of firms are seeing actual success. Morningstar shows that 10 issuers control more than 74% of assets and inflows into active ETFs. Many of these firms have plenty in common.
Firms like J.P. Morgan and Dimensional Fund Advisors (DFA) have used mutual fund-to-ETF conversions and bring-your-own-assets to their advantage. By transforming mutual funds into ETFs or moving client money in SMAs/wealth management accounts into ETFs has instantly created large active ETF franchises. And speaking of franchises, firms like Capital Group or BlackRock have been able to leverage their top fund brands to pivot into active ETFs and gather assets with ease.
On the one hand, investors have been flocking to active ETFs in spades to gain tax and return advantages. On the other hand, they’ve been choosing just a handful of firms.
Evening the Playing Field
But smaller issues shouldn’t fret — they have plenty of ways to catch up. Particularly when it comes to adding ETF share classes of existing mutual funds. Vanguard has long held a patent that allowed its ETFs to be considered share classes of its existing mutual funds. However, that patent has now expired, and numerous issuers have filed for exemption under the expired patent.
This could instantly create a surge of active ETFs as these issuers add this share class to existing mutual funds. As of last year, there were more than 6,500 active mutual funds on the market — that’s a lot of active ETF potential.
Another win could be in niche and fixed-income products. Funds offering interesting strategies such as liquid alternatives, covered calls and other hedge fund-like strategies could win big for new issuers, as can fixed-income strategies. The esoteric nature of bonds lends itself well to active ETFs, and most of the asset gathering has come from these sorts of funds.
Popular Active ETFs
These ETFs are sorted by their YTD total returns, which ranges from -2.7% to 9.7%. They have expense ratios between 0.17% and 0.36% and have assets under management between $5B and $30B. They are currently yielding between 0.8% and 9.7%.
| Ticker | Name | AUM | YTD Total Ret (%) | Yield (%) | Exp Ratio | Security Type | Actively Managed? |
|---|---|---|---|---|---|---|---|
| JEPQ | JPMorgan Nasdaq Equity Premium Income ETF | $5.58B | 7.8% | 9.7% | 0.35% | ETF | Yes |
| DFUV | Dimensional US Marketwide Value ETF | $8.5B | 6.2% | 1.5% | 0.21% | ETF | Yes |
| DFAC | Dimensional U.S. Core Equity 2 ETF | $20.9B | 5.7% | 0.8% | 0.17% | ETF | Yes |
| JEPI | JPMorgan Equity Premium Income ETF | $29.2B | 4.1% | 7.4% | 0.35% | ETF | Yes |
| MINT | PIMCO Enhanced Short Maturity Active ETF | $9.7B | 2.1% | 5.3% | 0.35% | ETF | Yes |
| JPST | JPMorgan Ultra Short Income ETF | $22.8B | 1.7% | 5.2% | 0.18% | ETF | Yes |
| AVUV | Avantis U.S. Small-Cap Value ETF | $6.7B | 0.80% | 1.4% | 0.25% | ETF | Yes |
| DFAT | Dimensional U.S. Targeted Value ETF | $8.2B | -0.4% | 0.8% | 0.28% | ETF | Yes |
| FBND | Fidelity Total Bond ETF | $5.1B | -2.7% | 4.9% | 0.36% | ETF | Yes |
All in all, the surge in active ETFs is just getting started. Asset gathering has remained swift, and despite being dominated by a few fund families, there is plenty of room to grow for other managers as well. The real winners will be investors, as they now have plenty of tools to use in their portfolio construction.
Bottom Line
Active ETFs have been the main story this year with plenty of asset gathering. Now, with 50 straight months’ worth of inflows, we can firmly say that investors are choosing them in spades. The best part is that the growth is just getting started. Already, 2024 is shaping up to be a record year, and active ETFs have the potential to dominate the fund landscape over the long term.
