In an environment rocked by volatility last year, some investors took solace in actively managed ETFs that have a manager there to steer the investment and adapt to sudden market changes.
According to Morningstar data, actively managed ETFs attracted a record $27.5 billion in new inflows last year while inflows into index-based passive ETF strategies slowed for the first time since 2013, the Wall Street Journal reports.
While passive funds still remain the dominant investment of choice for many ETF investors, the gains in the active ETF segment reveal the growing potential for active managers in the traditionally passive ETF industry, especially during more volatile conditions.
According to XTF data, there are 2,264 U.S.-listed exchange traded products on the market with $3.6 trillion in assets under management. There are 1,172 traditional passive index-based ETFs with $2.8 trillion in assets, compared to the 270 actively managed ETFs with only $72.5 billion in assets.
“The human element of active ETF management is appealing to investors who are getting skittish when markets are volatile,” Todd Rosenbluth, director of ETF and mutual-fund research at CFRA, told the WSJ.
This is good news for ETF providers specializing in more sophisticated strategies that have been trying to compete against low-cost index funds that have quickly garnered more and more assets over the years.
Most of the inflows into active ETFs went into fixed-income strategies, a quickly growing segment of the industry as the Federal Reserve hiked interest rates and investors looked to knowledge fund managers that were able to navigate the changing conditions.
“The lines have blurred,” Rosenbluth added. “We’re seeing more large active managers enter the active ETF space.”
Looking ahead, Rosenbluth argued that the more uncertain conditions could force investors to reconsider their commitment to plain-vanilla index-based strategies after sitting comfortably on their hands through a multi-year bull market. Furthermore, active ETFs may also be a more appealing alternative to actively managed mutual funds given the tax-efficient and cheaper ETF wrapper.
Investors are also demanding more active ETFs. According to an annual survey by Brown Brothers Harriman, wider selection of active ETF strategies tops the current wish lists of U.S. investors and advisors.
Nevertheless, the industry remains reluctant in adding new active ETF offerings since many would have to reveal their secret sauce under the transparent nature of the ETF investment vehicle.
“If you’re a mutual-fund warehouse, you’re trying to figure out how to grow your business without giving away your secret sauce,” Nichole Kramer, an ETF supervisor with Alps Inc.’s intermediary services division, told the WSJ.
For more information on the ETF industry, visit our ETF performance reports category.