Though active funds only account for less than 6% of all assets in the $7 trillion ETF market, investors have flooded money into them so far in 2023, with 30% of total flows going to active funds, according to Bloomberg Intelligence data that is cited in an article in The Wall Street Journal. 2022 was also a very good year for active ETFs, with 14% of total flows.
Though actively-managed stock funds routinely underperform broad indexes in the long term in the U.S., active ETFs have attracted investors because they’re more flexible, with options for investors to use specific strategies, analysts say. Individual investors are able to deploy more complicated trading strategies through actively managed ETFs, such as JPMorgan’s Equity Premium Income ETF which has topped the popularity list this year with $7.1 billion in new cash. Over the last year, the fund, which launched in 2020, offered a 12-month rolling dividend yield of 11.7%. Another of JPMorgan’s funds is on this year’s top 10 list, and four of the funds are fixed-income funds and four are actively-managed equity funds, the article reports.
At Principal Asset Management, chief global strategist Seemah Shah told The Journal that uncertainty about inflation and high interest rates’ long-term affect on companies is driving investors towards active strategies. Principal’s own U.S. megacap ETF has gathered about $150 million so far this year; the strategy is focused solely on huge companies like Apple and Microsoft and has returned 11% this year, compared to the S&P 500’s 7.3%. In this volatile environment, “active management should outpeform,” Shah said, adding that investors “need to know the sector, and even within sectors, there’s going to be major dispersion.”
But for the rise in inflows to some actively-managed funds, others are losing their popularity. State Street’s SPDR Blackstone Senior Loan ETF invests in loans from companies that generally have lower credit ratings; $1 billion has been drained out of the fund this year, perhaps driven by concerns over high interest rates and the banking sector’s overall health. Meanwhile, one of the most well-known ETFs, Cathie Wood’s ARK Innovation fund, has seen $185 million in outflows, although the fund has climbed 14% so far in 2023 after plummeting 67% last year, the article reports.
Meanwhile, asset managers are moving fast to fulfill the demand for actively-managed funds that are more widely accessible, such as Dimensional Fund Advisors, which had previously managed mutual funds only open to financial professionals and institutions. Over the last few years, it converted some of those mutual funds to ETFs as well as launched new ones. By the end of last year the firm had $70 billion in 30 active ETFs under management, making it the largest active ETF manager, with inflows of $9.4 billion so far this year. ETFs typically have lower fees than mutual funds, adding another boost to investors’ returns. And while active funds are relatively new to the ETF industry, this year’s substantial inflows are an indication that they are likely to remain popular for some time. Elisabeth Kashner at FactSet told The Journal, “They used to be a footnote in the market but their presence is now much more strongly felt.”