After a record-setting first quarter of $65 billion of net inflows for actively managed ETFs, many of the largest such funds brought in fresh money in April. Advisor and end investor demand for security selection combined with the benefits of the ETF structure remains strong.
During the VettaFi Fixed Income Symposium in April, we heard from advisors about their usage of active ETFs. While one-third had less than 10% of their fixed income ETF exposure tied to active management, 28% had more than half of their exposure.
Active Mutual Funds Dominate But Are Losing Share
Despite growing adoption of ETFs, most actively managed fund assets remain in mutual funds. According to a NYSE report, active mutual funds managed $13.4 trillion compared to $620 billion for active ETFs as of March 2024.
However, the same report showed that sentiment toward active ETFs has been improving since 2019. Active ETFs pulled in net inflows annually, while active mutual funds have incurred net redemptions. On a cumulative basis, active ETFs added more than $450 million, while active mutual funds had more than $2.5 billion in net outflows.
We believe one of the reasons is that asset managers have increasingly given clients a choice between mutual funds and ETFs. Some like Fidelity, SS&C ALPS Advisors, and T. Rowe Price offer analog ETF versions of well-established mutual fund strategies. Meanwhile, others like BlackRock, Capital Group, and Pimco have launched new strategies that leverage the style expertise of in-house managers but with distinctions between the products.
Tax Benefits of ETFs
One of the known benefits for ETFs has been tax efficiency. With most mutual funds, the end investor often pays capital gains annually regardless of whether they sold any shares or even if the fund had a positive return. To meet other shareholders’ needs, mutual fund managers must sell positions, which impacts the broader portfolio.
In contrast, most investors in ETFs do not have such a burden. This is due to the creation and redemption process of ETFs and because most ETF trading takes place on the secondary market and does not affect the ETF assets.
I believe many advisors understand this for index-based ETFs like the iShares Core S&P 500 ETF (IVV). However, actively managed ETFs can be a tax-efficient alternative to mutual funds.
Active ETFs Are Tax Efficient Too
For example. the T. Rowe Price Blue Chip Growth Fund (TBCIX) managed $61 billion in mutual fund assets at the end of March 2024. While the institutional share class has been around since 2015, the portfolio dates to 1993. This mutual fund takes a relatively patient, long-term approach, evidenced by a miniscule 8% turnover rate in the one-year period ended March.
However, in the last three calendar years, loyal shareholders of TBCIX have received capital gains that ranged between 3.4% and 8.7% of the fund’s net asset value (NAV). In contrast, the similarly named ETF, the T. Rowe Price Blue Chip Growth ETF (TCHP), incurred either zero capital gains for the year or just 0.02% of NAV.
TCHP is not a share class of the identically named mutual fund but separate yet similar $550 million ETF that launched in August 2020. Paul Greene manages both the mutual fund and the ETF, which have identical top-10 holdings that combined represent more than 60% of assets.
VettaFi believes actively managed ETF demand will continue in the second half of 2024 and beyond. We believe as more advisors and investors better understand some of benefits of these products and conducts due diligence on the strategies.
Virtual Summit on Active ETFs
We heard from many active managers, including from Capital Group, Fidelity, and T Rowe Price, as well as experts tied to index ETFs at the Fixed Income Symposium. VettaFi is hosting a two-hour virtual summit on May 16 focused solely on active ETFs. Advisors can obtain CE credits for attendance.
I will talk with Nate Geraci, president of the ETF Store and the host of ETF Prime podcast, as well as managers of four actively managed ETFs. One such fund will be the ALPS/SMTH Core Plus Bond ETF (SMTH). SMTH already manages $675 million despite launching in December 2023. Register to join us.
For more news, information, and strategy, visit the ETF Building Blocks Channel.
