While ETFs have historically been an index-only business, more investors are pouring their money into active ETFs so far this year than they did in 2022. After actively managed exchange traded funds brought in 14% of investor flows into ETFs in 2022 (a record), “we’re looking at close to 40% of the flows” going into ETFs so far this year are heading into active funds, according to VettaFi financial futurist Dave Nadig.
“It’s only really been in the last year and a half or so that we’ve seen any real interest in active ETFs,” @Vetta_Fi‘s @DaveNadig says, adding: “Clearly this is a story of investors slowly coming to this realization that active [ETFs] may have a place in their portfolio.” pic.twitter.com/qLSYxoRZRc
— Yahoo Finance (@YahooFinance) March 1, 2023
“It’s really only been in the last year and a half or so that we’ve seen any real interest in active ETFs,” Nadig said while appearing on Yahoo Finance. “Clearly, this is a story of investors slowly coming to this realization that active may have a place in their portfolio.”
Nadig explained some of the reasons for active’s rise in popularity. For one thing, “we just had a big down market.” In a down market, two things happen: investors lose their confidence, and take advantage of tax-loss harvesting opportunities.
“People lose their conviction a little bit. They may have been in an index strategy they just saw themselves take a haircut, maybe now they want somebody minding the store,” he said. “The other big thing is we just went through a big tax-loss harvesting season. A lot of folks who were in underperforming funds… took the opportunity to sell and book the loss.”
As these investors return to the market in 2023, in the equity space, Nadig said he is seeing an increased interest in “finding individual portfolio managers or teams of portfolio managers to run that money.”
“Whether or not it’s going to work, you never know,” he added.
“Traditional Stock-Picking Active Managers”
In terms of the actively managed ETFs that are attracting the most amount of money, Nadig said that “they’re actually fairly traditional stock-picking active managers.” He highlighted the Capital Group Growth ETF (CGGR) as one active fund that’s gaining a lot of investor attention.
CGGR has been beating its benchmark (the S&P 500) “by about 4% or 5% so far this year.” As a result, the Capital Group fund has pulled in a couple hundred million dollars while a complex of S&P 500 index ETFs have seen $10 billion in outflows in just eight weeks.
“So, clearly that’s a real reallocation we’re seeing,” Nadig said.
“What Could I Have Done Better?”
When asked about what a prolonged interest rate hike cycle from the Federal Reserve could mean, Nadig said that it “lends itself to people questioning their allocations.” They ask themselves, “’What could I have done better?’”
“If rates are now going to be 50 or 75 bps… finding a seasoned portfolio management team at least may make you sleep better at night.”
VettaFi’s financial futurist did acknowledge that active management’s track record “is not actually that great,” noting that “only about 45% of active managers managed to beat their benchmarks last year.”
“And that was a great year,” Nadig added.
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