More investors are leaning on active ETF management strategies as economic unknowns continue to keep the capital markets on edge. As such, the dynamic flexibility offered by active management can help to mitigate risk and volatility.
“Globally, 82% of investors plan to increase or maintain their exposures to active ETFs this year as conversions from mutual funds into actively managed ETFs intensifies,” noted Eamon O’Callaghan, of Brown Brothers Harriman (BBH) in a Funds Europe blog. “Just over 90% of investors bought an active ETF in the last 12 months, with 46% allocating from index mutual funds and 42% allocating from active mutual funds.”
The data for this year is compelling. Investors are already allocating more capital into active management strategies compared to last year.
“The $840 million of assets in active ETFs as of the end of February 2023 is nearly equal to the annual inflows in all of 2022 ($874 million), according to ETFGI,” the blog noted further.
What’s Driving the Switch?
While thus far, market volatility in 2023 hasn’t matched the level of fluctuations in 2022, nobody has a crystal ball to predict the future. There are headwinds, however, that can certainly induce volatility through the rest of the year such as the potential of a recession.
Active management allows portfolio managers to reduce or increase the holdings of an ETF as market conditions change. This level of dynamism gives investors more flexibility without having to monitor their portfolios constantly.
With an active strategy, risk management is essentially baked into the fund versus a passive strategy. The BBH market outlook cited four reasons for the increase in active investing: costs, transparency, liquidity, and diversification.
Costs remain top-of-mind for investors as they continue to wrestle with inflation. The cost of active ETFs is starting to come down and present more efficient options versus their mutual fund counterparts (BBH cited an average of 34 basis points for active ETFs).
Because ETFs publish their holdings daily, this also adds a level of transparency versus mutual funds. ETF liquidity also allows the funds to be bought and sold in the marketplace quickly, allowing for intra-day trading opportunities.
Lastly, active ETFs offer more diversification that can add to an investor’s current portfolio mix. Consider a pair of active ETF options from T. Rowe Price such as the U.S. Equity Research ETF (TSPA) and the T. Rowe Price QM U.S. Bond ETF (TAGG).
For more news, information, and analysis, visit the Active ETF Channel.