While passive and index funds put exchange traded funds (ETFs) on the map, active management has quickly taken the ETF world by storm. Offering low fees, intraday tradability and lower potential for capital gains taxes, active ETFs overcome many of the issues with active management in other fund forms.
It looks like investors agree.
Fund flows into active ETFs underscore how popular the vehicle is for investors on both the retail and institutional fronts. And the growth doesn’t seem to be stopping anytime soon. With new funds being launched every week, active ETFs have plenty of steam to overtake their rivals.
A Big Surge in Active ETF Fund Flows
Fund flows are often used by data and research firms to help show and predict trends within the investing universe. You can easily tell which sectors, regions and asset classes are popular with both retail and institutional investors. The latest data shows that active ETFs are quickly becoming the popular way for investors to build their portfolios.
According to a recent report by Bloomberg Intelligence, active ETF have gathered about 30% of the total flows into ETFs so far in 2023. This follows the 14% of total inflows gathered in 2022. Last year was considered a “banner” year for the active ETF space, with numerous fund’s launching and many hitting critical mass for sponsors. Active ETF fund flows represented 9.5% of total flows in 2021.
Some funds have grown very big on the increased fund flows, making them larger than some of their passive rivals. For example, both the J.P. Morgan-sponsored JPMorgan Equity Premium Income ETF (JEPI) and JPMorgan Ultra-Short Income ETF (JPST) have nearly $50 billion in assets between them, while Dimensional Fund Advisors (DFA) has close to $90 billion across its suite of funds. Even smaller active ETF issuers have found a foothold in the space. Through its PGIM Ultra Short Bond ETF (PULS), insurer Prudential has close to $4.5 billion in assets.
Reasons Behind the Surge in Fund Flows
Investors continue to be drawn towards active ETFs for a number of reasons. Two of the biggest could be tax savings and overall lower costs.
Pundits have talked about the ability of a lot of ETFs to help investors save on taxes. The problem with mutual funds is that buy and sell decisions by managers can have capital gain consequences for investors, even if they still hold shares of the fund. Thanks to the structure of ETFs and the creation/redemption mechanism behind them, capital gains are limited or non-existent in most cases. This is wonderful for active managers.
Secondly, ETFs are cheaper to operate than a mutual fund. As a result, fees for active ETFs are less than comparable mutual funds. Currently, actively managed ETFs have an average expense ratio of 0.7%. But many – such as the previously mentioned JPST – can be had for under 0.20%. Active management can and does outperform passive in many instances. However, the higher fees often hinder the ability of managers to outperform the index. So, the real debate shouldn’t be active vs. passive, but rather expensive vs. cheap.
Finally, active ETFs have the ability to not look like the indexes: fleeing to cash, buying values, and overweighting/underweighting sectors and regions. This can provide an edge when markets get dicey such as today.
Plenty of Growth Ahead for Active ETFs
The best part is that active ETFs have plenty of room for continued growth. Despite the two years of top fund flows, active funds only make up about 6% of the $7 trillion ETF market.
For one thing, fund launches have continued to be swift. So far, 2023 has seen over 50 new active ETFs hit the market. Issuers have been varied as well, including many traditional mutual fund-based asset managers as well as new sponsors. Additionally, Vanguard’s patent expiration could see a surge in ETFs as a share class of active funds. Likewise, mutual funds to ETF conversions are still rapidly happening.
And as costs and fees fall as well, many investors will turn to active ETFs to build their portfolio alongside passive options. As we said, lower fee hurdles for active managers allow them to actually outperform and provide those gains for investors.
Finally, growing investor acceptance will drive further fund flows into active ETFs. ETFs need a critical mass of assets before closure risks and trading volumes take off. With many active funds now having billions in assets, that mass is there. Investors on the sidelines will feel comfortable in adding them to their portfolios.
List of some of the largest active ETFs
| Name | Ticker | Type | AUM | YTD Ret (%) | Expense |
| JPMorgan Equity Premium Income ETF | JEPI | ETF | $25.9 billion | 2.5% | 0.35% |
| JPMorgan Ultra-Short Income ETF | JPST | ETF | $24.88 billion | 1.4% | 0.18% |
| Dimensional U.S. Core Equity 2 ETF | DFAC | ETF | $19.7 billion | 5.7% | 0.17% |
| PIMCO Enhanced Short Maturity Active ETF | MINT | ETF | $8.66 billion | 1.9% | 0.35% |
| First Trust Enhanced Short Maturity ETF | FTSM | ETF | $8.2 billion | 1.8% | 0.25% |
| ARK Innovation ETF | ARKK | ETF | $7.7 billion | 25.2% | 0.75% |
| Dimensional U.S. Targeted Value ETF | DFAT | ETF | $7.49 billion | -1.3% | 0.28% |
| iShares Ultra Short-Term Bond ETF | ICSH | ETF | $6.32 billion | 1.8% | 0.08% |
| Dimensional U.S. Equity ETF | DFUS | ETF | $6.2 billion | 9.7% | 0.09% |
| Dimensional World ex U.S. Core Equity 2 ETF | DFAX | ETF | $5.66 billion | 6.5% | 0.3% |
The Bottom Line
Fund flows show that investors are quickly choosing active ETFs to help build their portfolios. Thanks to lower costs, tax savings and other benefits, passive ETFs have proven to be winners. And now, active ETFs are following in their footsteps. With plenty of new fund launches, 2023 could be the year that active truly takes off.
