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Sep 20, 2023

US active ETFs perform better than passive counterparts in past year

Morningstar report details 8,212 unique funds that account for around $17 tn in assets

Actively managed ETFs in the US have made a surprising comeback in the first half of 2023 to provide better returns than their passive counterparts, new data shows.

Around 57 percent of active strategies beat their average passive equivalent during the 12 months to the end of June 2023, a steep rise from the 43 percent success rate recorded in the year to December 2022, according to a Morningstar report.

Meanwhile, active strategies that invested in stocks outside the US saw the biggest turnaround, with more than 63 percent of active funds beating their average passive peer, the report details. Active funds also outperformed across asset classes and in nearly all categories tracked by the researcher, apart from corporate bond funds.

The news stands in contrast to recent data that suggested passive investment was on the rise, with index investors thought to be an increasingly important target for IR activities.

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

Cheap high-quality strategies

But while the recent surge in returns was promising for actively managed funds, it falls short on the long-term track record against their passive peers. For the past decade, only one in every four active strategies reigned over its average passive counterpart, Morningstar reports.

Across the 10 years to June 2023, the average sum invested in active funds outperformed the average active fund in 19 of the 20 categories examined. ‘That implies investors favor cheaper, higher-quality strategies,’ the Chicago-based researcher says.

Only 10.5 percent of US large-cap funds beat their average passive rival in the recorded decade to 2023. For active mid-cap and small-cap managers, the results were greater, with success rates of 28.4 percent and 36.4 percent, respectively.

‘The distribution of surviving active funds’ excess returns versus their average passive peer helps investors understand not just the odds of picking a successful manager but also the prospective payout or penalty,’ the report’s authors write.

Last month’s barometer found that ETFs were growing in popularity more quickly than passive funds at an organic rate of 14 percent during the first half of 2023, compared with a 3 percent growth rate for passive ETFs.

The barometer spans nearly 8,212 unique funds that account for approximately $17 tn in assets, or about 55.9 percent of the US fund market, at 2023’s midpoint.