When exchange-traded funds were first launched 30 years ago, these index-tracking vehicles were designed for institutional money managers. The audience was limited, thus the marketing potential was, too. Few on Wall Street expected the ETF industry to become the transformative force it is today.

Looking back, the ETF market has matured so much that it hardly resembles the first generation of funds. It’s comparable to a butterfly that looks nothing like its caterpillar self.

ETFs have since gone beyond broadly diversified strategies. They now offer narrow, surgical exposure to specific themes and sectors. Moreover, investors can hedge their portfolios against market declines using buffered versions of the products. Lear year, they became even more narrowly focused when new products emerged that tracked derivatives on single stocks like Tesla and Apple. It’s another example of how the ETF market continues to redefine itself.   

But it’s really the growth trajectory of actively managed ETFs that deserves special attention

In the past six years alone, a remarkable 902 actively managed funds have been launched. Amazingly, 80% of this activity has occurred in the past three years alone. It’s a pretty impressive feat considering that there was a global pandemic and a bear market during that time.

Despite 2022’s market declines, however, inflows into nearly all asset categories within the active ETF arena went up.

Active ETF asset flows in the domestic and global equity category were the biggest gainers, jumping to a total $70.9 billion. To put that figure in perspective, consider actively managed mutual funds, which lost an incredible $926 billion during the same period. In fact, 2022 was the worst calendar year for active mutual fund outflows ever. The active mutual funds’ organic growth rate was negative 4.6%, according to Morningstar. That was also a record.

Is it any wonder Wall Street is making a mad dash to convert legacy mutual funds to ETF wrappers?

Last year, 13 separate issuers executed more than $20 billion in mutual fund-to-ETF conversions, according to New York Stock Exchange data. And this year, another 15 issuers are expected to complete such conversions, to the tune of another $20 billion.

The tiny alternatives category offers another peek at the same trend.  

Active ETFs in the alternatives space vacuumed in $3.1 billion in 2022, their largest cash flow ever recorded for a single year. Both advisors and investors poured triple the amount of money into active alternative ETFs than they did during the previous five years combined. There was also strong demand (as shown by asset flows) for managed futures and real return strategies, which try to dampen the impact of high inflation and rising rates.

When it comes to inflows, the overall ETF market is being dominated by active funds.

Among 2022’s top 10 ETFs by newly gathered assets, every single product was actively managed. This group was led by the JPMorgan Equity Premium Income ETF (JEPI), the JPMorgan Ultra-Short Income ETF (JPST) and the Dimensional U.S. Core Equity 2 ETF (DFAC). These three funds alone raked in $21 billion combined.

As the ETF industry celebrates its three-decade history, it’s important to reflect on what comes next.

While the original audience for ETFs was small, the current user base is still expanding. Moreover, the industry’s effort to serve a wider base, moving beyond institutions to retail customers, is causing a massive shift in the asset management business.

In the end, it’s not just about the arrival of actively managed ETFs but their growth that’s become an important element of the shift.