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Aug 03, 2023

Active ETFs show strong growth in first half of 2023

But indexed strategies continue to climb as overall share of assets

Actively managed ETFs are growing more quickly than passive funds and ‘steadily gaining acceptance’ in the investment world, according to a new report from Morningstar.

Active ETFs grew at an organic rate of 14 percent during the first half of 2023, finds the data firm, compared to a 3 percent growth rate for passive ETFs. Organic growth rate refers to the cumulative flows for the time period, divided by the initial net assets.

The growing popularity of non-indexed ETFs means that they now account for 5 percent of global ETF assets, say the study authors.

‘The US dominates the category, with 78 percent of assets under management residing there,’ they explain. ‘Actively managed ETFs in Asia grew at a 78 percent rate in the first half of the year (albeit from a small base), the highest rate of any region by far.’

ETFs have traditionally focused on low cost, passive strategies, where they have had huge success at drawing assets away from mutual funds. But now fund houses are increasingly embracing the ETF structure for active strategies as well.

Top performer

Underlining the appeal of active products, the JPMorgan Equity Premium Income ETF saw $10 bn of net inflows during the first six months of the year, Morningstar notes, putting it among the top 10 most popular funds of any variety.

The active ETF invests in a ‘defensive’ selection of US companies and sells out-of-the-money S&P 500 call options, offering equity exposure but also protection against a reversal in stock prices.

Investment firms have begun to post their star fund managers to active ETF products, noted the Financial Times last month. For example, Tony DeSpirito, BlackRock’s global chief investment officer of fundamental equities, made his debut in May as an active ETF manager with the Large Cap Value ETF.

‘The pendulum has swung to active ETFs away from traditional active mutual funds and it doesn’t look like it’s coming back,’ Todd Rosenbluth, head of research at consultancy VettaFi, told the newspaper. ‘Having your best managers available for those investors that are interested in ETFs is becoming more important.’

The trend means IR professionals will need to become more familiar with active ETF funds as they engage with shareholders and prospective investors. One positive aspect may be increased transparency: most active ETFs publish their full list of holdings every day. 

Despite the growth in popularity of active ETFs, passive investments continue to take a greater share of overall fund assets, according to the Morningstar report. Indexed strategies now stand at 39 percent of global assets, it explains, up from 31 percent at the end of 2019.