Active ETFs catch the eye of RIAs and big funds, too

According to CFRA data, through the end of last year, active ETFs made up 4% of all ETF assets, and represented 10% of ETF net inflows in the past year.

Independent registered investment advisers, as the largest buyers of exchange-traded funds, are forcing the asset management industry to dedicate more resources to the lower-cost, more liquid fund wrapper, and active strategies are increasingly coming along for the ride.

“There’s been demand and even stronger supply by asset managers to offer actively managed ETFs,” said Todd Rosenbluth, director of mutual fund and ETF research at CFRA.

According to CFRA data, through the end of last year, active ETFs made up 4% of all ETF assets, and represented 10% of ETF net inflows in the past year.

Some of the major old-school mutual fund players recently moving into the active ETF space include American Century, Davis Funds, Dimensional Fund Advisors, Fidelity, Franklin Templeton, Janus Henderson, JPMorgan, Nuveen, Pimco and Principal Financial.

“You get some of the benefits of the ETF structure, with tax efficiency and liquidity,” Rosenbluth said. “The fees tend to be better compared to active mutual funds because they have to cut the fees to be competitive.”

FOCUS ON ETFs

While assets are slowly moving into active ETFs, Rosenbluth said many traditional fund companies don’t have any choice but to develop ETF wrappers around active strategies because financial advisers increasingly are focused only on ETFs.

“Advisers are being given a choice, and the asset managers are hoping instead of pulling money from the fund family and going toward someone else’s ETF, that some investors and advisers like the strategy and the team and also like the benefits of an ETF and this is a happy middle ground,” Rosenbluth said.

“I think demand for active management and equity ETFs is building” he added. “For some of the firms that entered, they now have to be able to prove that they can function.”

Rosenbluth believes many of the legacy asset managers that have clung to mutual funds for so long will continue to migrate toward the ETF wrapper.

“Some of the money moving out of active equity mutual funds is doing so reluctantly into index-based ETFs, because investors and advisers prefer the ETF structure,” he said. “We’re going to see more of these [active] products. But it’s still hard for active management to demonstrate outperformance, and the ETF structure only offers some of the benefits. The portfolio managers still need to pick the right stocks.”