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The debut of the SPDR S&P 500 ETF Trust (NYSEARCA: SPY) more than 30 years ago kicked off a passive investing boom of epic proportions.
Today, exchange traded products of both the active and passive varieties have $7.32 trillion in combined assets under management across 3,165 products as of the end of the June and that’s just the domestic ETF market.
Indeed, the bulk of those assets are allocated to passive ETFs. Of the 100 largest domestically traded ETFs as measured by assets, just three are actively managed. Congratulations to the JPMorgan Equity Premium Income ETF (JEPI) for being the king of that trio with an impressive $28.34 billion in AUM.
Helped by a groundswell of mutual fund to ETF conversions, 2023 is on pace to be one of the best years on record for inflows to actively managed ETFs and this could be the start of a more substantial trend as advisors seek the upside potential and risk mitigation offered by active management.
Active ETFs Are on a Roll
SPY is the first US-listed ETF and its over 30 years old. By comparison, active ETFs are young with the first having debuted in the U.S. in 2008. That is to say the asset class has some growing to do and data confirm it’s doing just that.
“After 39 consecutive months of inflows, active ETFs now have over $420 billion in assets. While this is still below the $6.8 trillion in indexed-based ETFs, the growth rate active ETFs have seen has been far greater,” notes State Street Global Advisors (SSGA). “Active ETFs’ five-year compound annual growth rate (CAGR) of 48% is more than three times the rate for passive ETFs — and the industry overall. And over those last five years, cumulative flows into active ETFs (+$327 billion) totaled more than 555% of start-of-period assets ($59 billion) versus a modest but still impressive 70% for passive ETFs.”
Other stats bode well for active ETFs, too. As SSGA, itself an issuer of some sizable active ETFs, 100 such funds have launched just this year. Additionally, a recent survey by Mitre Media indicates that 70% of advisors polled “said they intend to purchase shares of an active ETF in the future.”
Understanding Why Active ETFs Will Continue Growing
More well-known active mutual fund issuers see the writing on the wall and it says “Advisors and investors prefer ETFs.” Importantly, that’s not a commentary on active management. Rather, it’s an endorsement of the ETF wrapper – one that lends itself to lower fees and superior tax efficiencies. Those are two traits that meaningful to long-term-minded clients.
Additionally, some clients and retail investors like the little things, including on-screen volume and daily disclosure of holdings – attributes that aren’t common among actively managed mutual funds. Importantly, active ETFs don’t cheat clients out of performance potential.
“All of the potential benefits mentioned above for active ETFs do not come in lieu of weaker performance/alpha potential versus active mutual funds. In fact, the amount of active ETFs outperforming their benchmark over the last five years (39%) is the same as active mutual funds,” concludes SSGA. “When breaking it out by asset class, active bond ETF managers did better than active bond mutual fund managers, as 59% of the ETFs beat their benchmark while only 38% of mutual funds did.”