Record inflows. Record fund launches. Record assets. If active money management is in decline, someone forgot to tell the ETF industry.
Amped up by a meme-crazed market and emboldened by the success of Cathie Wood’s Ark Investment Management, stock pickers are storming the $6.6 trillion U.S. exchange-traded fund universe like never before—adding a new twist in the 50-year invasion from passive investing.
Passive funds still dominate the industry, but actively managed products have cut into that lead, scooping up three-times their share of the unprecedented $500 billion plowed into ETFs in 2021, according to data compiled by Bloomberg. New active funds are arriving at double the rate of passive rivals, and the cohort has boosted its market share by a third in a year.
“Historically, people have thought about ETFs as being indexed-based,” said Todd Rosenbluth, head of ETF and mutual fund research at CFRA Research. “Then Ark became a household name, and then investors came to realize that not only were those products worth looking at, but so were others.”
None of this is supposed to happen in an industry built on the magic of indexing. Yet a market roller coaster brought on by the pandemic is helping discretionary asset managers turn ETFs to their own advantage.
Equity conditions in general have become conducive to an active approach, leadership shifting in a stop-start economy, an unpredictable macro backdrop, and increased market breadth.
At the same time, investors are showing an unusual willingness to make concentrated bets, from riding the meme-stock madness to following the kind of thematic vision laid out by Wood.
They’ve poured $62 billion into active ETFs year-to-date. That’s 12% of total flows going to a slice of the market with only 4% of assets. In the rush to tap the burgeoning demand, issuers have now launched 156 actively managed products in 2021, compared with 77 passive funds.
“At the end of day, the ETF is just a wrapper, it’s just a way to package and distribute an investment strategy,” said Ben Johnson, director of global ETF research at Morningstar. “More investors are getting hip to the fact that the notion of an actively-managed ETF is not an oxymoron.”
Fifty-Year Battle
The active surge is the latest development in a money-management battle that’s been raging since July 1971, when a team at Wells Fargo & Co. created the original index fund.
Today, the passive juggernaut is slashing industry costs, opening up investing to the masses and forcing discretionary traders to adapt or die. Active launches may be booming, but the bulk of cash flooding U.S. stocks is still destined for big, cheap funds that do nothing but track the market.
“Active ETFs are doing better than they have in past, but passive is still king,” said James Seyffart, an ETF analyst for Bloomberg Intelligence. “A lot of that active flow in the big months from late 2020 to early 2021 is to Cathie’s funds.”