Active ETFs have had a big year in 2023. As well-covered in ETF media, active investing strategies have contributed significantly to a record number of ETF launches this year. At the same time, active strategies have added a significant amount of flows relative to their AUM. While this owes to advantages inherent to active, it may be worth looking at how the end of cheap money has impacted passive and active strategies and what that means for investors.
Indeed, the rapid pace of rate hikes has been the defining narrative for markets this year. In the United States, that has marked the end of a post-Global Financial Crisis (GFC) regime in which money was cheap and plentiful.
That milestone invites investors to consider how that long period of easy money boosted passive tremendously. A recent paper from the Federal Reserve saw that, for example, 42% of overall profit growth in the U.S. between 1989 and 2019 owed to the “decline in relative interest expenses and effective corporate tax rates.”
That “rising tide” to lift nearly all equity boats weakened differentiation among firms. At the same time, it made it easy for broad index-focused strategies to, over long periods, perform well without much work.
Active Investing in the ETF Industry
As the tide goes out again at the behest of central banks around the world, differentiation will return. According to a recent industry assessment by CFA UK, that creates opportunities for active investing.
“With markets receiving less support from central banks, valuations become more differentiated, creating opportunities for stock pickers and value investors,” the report argued. “Higher interest rates serve as tailwinds for active asset management strategies and vehicles as increased differentiation of valuations creates opportunities for stock pickers and value investors.”
A big year of active, then, may yet arrive into a longer-term “higher for longer” period that could boost stock picking. For those looking to take advantage of that change, consider the role active ETFs can play in your portfolio.
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