I’m often asked about the future of active ETFs.
For perspective, I see the entire ETF industry itself as being in the third inning of a nine inning game. But active ETFs are just settling into the first inning. Like with most “new” things, some figured active ETFs would have an immediate and significant impact on the industry; however, active ETF growth trends have been more in line with the growth trends of traditional passive ETFs when they were first introduced.
Some historical perspective
The first active ETF may have been launched in 2008; however, between 2008 and 2011 less than 30 funds were launched. The next three years saw approximately 100 active ETFs launched, with 12 new entries so far this year. Today, with about $21 billion invested in 131 or so actively managed US ETFs, these funds represent only a small fraction of the more than $2 trillion invested in ETFs.1
But let’s take a step back to gain some perspective. ETFs recently surpassed $2 trillion in assets, but it took time for investors to understand the advantages of passive ETFs and for these innovative vehicles to gain broad adoption.2 For instance, it took nearly five years for the first US ETF, SSGA’s SPDR® S&P® 500 ETF [SPY] to surpass $10 billion in AUM.3
Where do we stand today?
The requirement for active and passive ETFs to disclose their holdings on a daily basis creates concerns about front-running, the practice of investors trading on advance information. While these worries continue to limit the launches of certain active equity ETFs, it’s a different story for fixed income. Remember, it’s difficult for investors to front-run fixed income strategies due to the way the bond market works. Although individual investors can trade stocks electronically right along with institutional investors, the bond market remains an over-the-counter market lacking in liquidity and price transparency for all but the most liquid bonds.