Plenty of ink has been spilled about how much money has gone into active ETFs in 2023, and from a pure top-line flows perspective, it’s true. A significant chunk of the $289 billion that has entered U.S.-listed ETFs year to date went into active products — 22%, in fact. And that’s led to plenty of breathless headlines about how 2023 is the “year of the active ETF.”
It makes a nice marketing narrative, but don’t let the big numbers fool you. Most of those flows have gone into fewer than three dozen ETFs, leaving the other 800+ ETFs to fight over the scraps.
Dimensional & JP Morgan Lead in 2023 Active ETF Inflows
As of August 31, FactSet classified 920 ETFs as “actively managed.” That spans products from around 250 issuers, including everything from closet indexed funds to sophisticated laddering and options strategies to straight-up high-conviction stock picking.
From January 1 to August 31, these 920 ETFs saw $62.7 billion in flows. That translates to about 22% of all money going into ETFs in 2023.
To see if I could suss out any patterns, I took a closer look at the 50 actively managed ETFs showing the highest flows over that period. One thing stood out: Of the top 50 ETFs, fully 21 of them were from Dimensional ETFs.
Carving Out Space on the ETF Shelf
In fact, taken altogether, the 31 ETFs in Dimensional’s product suite account for 31% of total year-to-date 2023 flows into active ETFs.
In other words, 33 ETFs — or just 4% of the total number of active ETFs currently available to investors — have pulled in more than half of all money going into active ETFs year to date.
That’s great news for Dimensional and J.P. Morgan. On the other hand, it’s not so great for the other 200-odd issuers hoping to carve out space on the shelf for their products.
For Investors, Low Cost Matters Even for Active ETFs
So what’s so special about Dimensional’s products & JEPI/JEPQ? Well, if you’ve been around ETF Land for awhile, you probably already know the answer: They’re cheap.
Expenses for Dimensional’s products range from 0.09% for the Dimensional U.S. Equity ETF (DFUS), a core basket of US large caps; to 0.43% for the Dimensional Emerging Markets Value ETF (DFEV), which provides exposure to a fairly illiquid and difficult-to-access market (emerging market value stocks). Those fees rank on par or lower than most widely traded, index-based ETFs in their respective categories. DFUS costs as much as the SPDR S&P 500 ETF Trust (SPY) while DFEV costs less than the iShares MSCI Emerging Markets ETF (EEM), which costs 0.68%
It’s important to note that on a performance basis, Dimensional’s ETFs aren’t necessarily blowing their passive brethren out of the water. Some are, particularly their largest funds like the Dimensional U.S. Core Equity 2 ETF (DFAC), which is up 16.4% over a one-year basis compared to its FactSet category average of 9.8%. But others have more modest gains, or are pacing passive leaders. What’s important is that with a Dimensional ETF, investors can expect to do at least as well as the market, if not better.
It’s the same story with J.P. Morgan’s funds. At 35 basis points in annual fee, JEPI and JEPQ are also very low cost. They’ve also both become household names among retail investors and advisors alike for their ability to provide outstanding yield, month after month, for years. Currently, JEPI offers a 30-day SEC yield of 7.21%, while JEPQ offers 11.39%. (And JEPQ’s year-to-date return is 23.7%.)
Good ETFs Draw Investor Dollars
All of this is to say that the active ETFs soaking up flows in 2023 are, at their core, good ETFs — not by the standard of active ETFs, or by the standard of active management in general, but by the standard against which ETF investors are judging them: low-cost ETFs like SPY, the Vanguard Total Bond Market Fund (BND), the Schwab US Dividend Equity ETF (SCHD), and others that just so happen to be index-based.
The active ETFs getting flows are the ones meeting investors’ target objectives, whether that’s exposure or income — and they’re doing so without breaking the bank.
Take another look at the fees for the top 20 flows-getting active ETFs. The average is just 29 basis points. Meanwhile, the average equity ETF expense ratio is now 57 basis points. Almost all of these top active funds dominating inflows are also outperforming their FactSet category averages.
Active Managers Need a PR Win
In truth, Dimensional’s products and JEPI/JEPQ flows are skewing the overall picture. If you take these funds out of the total active ETF inflows for 2023, the remaining 887 active ETFs have only brought in $27.2 billion in flows year to date — or 9% of the total YTD flows for all ETFs. That’s pretty much on par with their historical average.
Not much worthy of a breathless headline in historical average.
So why does the narrative persist? In part, because active management badly needs a PR win. Over the past three decades, index-based ETFs have swallowed hundreds of billions of dollars from actively managed mutual funds.
Any active manager entering the ETF space right now in 2023 isn’t even skating to where the puck is; they’re lacing up their boots in the middle of the second period. They’ve missed out on significant asset flow and the chance to carve out a space for themselves in ETF investor portfolios next to Vanguard, BlackRock, and State Street.
Will FOMO Incent Investors to Allocate?
As active managers come to market, if they don’t have significant BYOA money to boost their initial orders out of the gate, then their products will likely struggle to gain appreciable ground. (“BYOA” means “bring your own assets,” a term coined by Bloomberg’s Eric Balchunas for the money asset managers move from existing client portfolios to support house-brand ETFs.)
Even then, BYOA cash isn’t a guarantee of additional inflow. Putnam, for example, owns almost 95% of the shares of the Putnam ESG Core Bond ETF (PCRB). But since its initial influx in February of $430 million, the fund has only taken in $13 million since.
So the narrative that there’s a groundswell of popular excitement for all ETFs actively managed benefits nobody more than the active managers, who hope that sense of FOMO will encourage investors to allocate.
Great Active ETFs Are Out There – If You Know Where to Look
Don’t get me wrong: I’m not saying that all other active ETFs aside from Dimensional’s and JEPI/JEPQ are clunkers. I’m not even implying that. I happen to think there’s quite a few excellent actively managed ETFs on the market — funds that achieve what they say they’re going to achieve, in a cost-effective manner.
That said, ETF investors aren’t stupid. They know that research shows most active managers struggle to outperform markets over the long term. That over time, expense drag from high fees inevitably will erode any alpha a savvy active manager could offer; and that active management tends to lead to high turnover and, in turn, more tax consequences, further chipping away at take-home return.
So with that in mind, I think ETF investors will continue to turn to the products that have proven to work best for them, whether their portfolios are picked by active management or not.
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