Wood has become the poster child for active management in ETFs. The flagship fund at Ark was one of the best-performing in America last year with a 149% return.
Inspired by this and her enticing thematic approach—which focuses on trends like robotics or space travel rather than market segments—investors have sunk $14.5 billion into Ark funds in 2021.
Passive Attack
The mini boom for active ETFs comes not a moment too soon for the stock-picking industry.
Passive funds—mutual and exchange-traded—now manage $11 trillion and are on course to hold 50% of all registered U.S. fund assets within five years, according to BI calculations.
Critics say the rapidly swelling index industry is blowing bubbles in stock markets, weakening corporate governance and more. And in some ways, it can also hit returns.
Take Tesla Inc.’s entry into the S&P 500 in December. While discretionary managers could buy Elon Musk’s firm in advance, index funds ended up adding it at an inflated valuation—and were forced to offload billions of dollars in other stocks to make space in portfolios.
“Index funds systematically buy high and sell low,” wrote Rob Arnott of Research Affiliates and his colleagues in a June paper. They argued investors would have been better off holding the company pushed out of the index to make way for Tesla.
The main advantage stock pickers enjoy over their passive peers is more flexibility in deploying their cash. That’s something they’ve been able to bring to ETFs for years—Wood’s first fund launched in 2014—but it was a rule change in 2019 that paved the way for the current jump in activity.
It made launching ETFs easier, and enabled new structures that could hide the strategy underpinning a fund. That helped lure multiple major Wall Street players to the industry after years of holding out, including the likes of Wells Fargo and T. Rowe Price.
Talk of discretionary management’s decline is still rampant, but the woes aren’t as bad as they may seem. Even as U.S. active funds—mutual and ETF—saw $209 billion exit last year, they closed 2020 with about $13.3 trillion under management. That was a 13% gain from 2019.
The increase was largely thanks to rising markets, but if the current trend continues, before long it could just as easily be down to ETF growth.
“We’re going to see the percentage of assets in actively-managed ETFs continue to climb higher,” said Rosenbluth at CFRA. “They’re going to continue to have the opportunity to punch above their weight.”
This article was provided by Bloomberg News.