After 2024 surge, active ETFs poised to surpass passive strategies

After a banner year featuring a historic number of launches and a record-setting level of inflows, active ETFs are set to play an even more prominent role in the US investment space.

That's according to a recent report from analysts at National Bank, one of Canada's largest lending institutions.

Looking back at 2024, the researchers said US exchange-traded funds hit a significant milestone, with a record-breaking 700 ETFs launched throughout the year. Active ETFs took the lion's share, accounting for 77 percent of total launches with 565 new products getting listed on exchanges.

The number of active ETFs now stands at 1,840, just 235 short of passive ETFs. “At the current pace, active is expected to surpass passive in the next year or two,” the report said.

Looking at inflows, the report said active ETFs took in $312 billion in new money, more than doubling the previous record set in 2023. This brought active ETFs' share of total ETF inflows to 28 percent, a sizeable jump from 12 percent five years ago. Active fixed-income ETFs proved popular among investors looking to navigate interest-rate volatility, as did multi-asset strategies like option-based ETFs.

Fund conversions also played a role in the growth of active ETFs last year, with more than 50 mutual fund-to-ETF transitions. The report said Stone Ridge led the trend in 2024 with 32 target-date fund conversions. Fidelity, Vanguard, and BlackRock also participated in the trend, though National Bank's report didn't highlight them specifically.

Still, the $5.5 billion in assets converted from mutual funds to ETFs was notably lower than in prior years, the report noted. Among other challenges, the National Bank analysts said certain mutual fund strategies "may not be well-suited for the ETF structure," along with the operational hurdle of ETFs not being eligible investment options in many corporate sponsored 401(k) plans.

"Mixed asset growth results from past ETF conversions might have made mutual fund providers more cautious about entering the ETF space," the report said.

As ETFs thrived, mutual funds continued to struggle last year, according to the report. Citing figures from the Investment Company Institute, it said mutual funds saw $479 billion in outflows from January to November. Over the same period, ETFs' share of total fund assets – including ETFs, conventional mutual funds, and money market funds – rose by 3 percentage points to reach 27 percent, or 32 percent when excluding money market fund assets.