Don't expect actively managed ETF trend to slow

ETF issuers sure were active in 2023 – especially when it came to actively managed funds.

According to fund tracker Morningstar, there were 530 new ETFs launched in 2023, the most in any single year in more than in a decade. And despite the fact that ETFs originally were marketed and sold as a way for investors to invest passively and tax-efficiently outside the traditional mutual fund structure, an overwhelming 73% of those new ETFs rolled out last year were actively managed.

And the funds didn’t only make outsized strides in terms of new issuance. Active ETFs also saw 21.9% of overall ETF flows in 2023, or $129 billion, according to Morningstar.  That’s up from $89 billion, or about 15% of all ETF flows, the prior year.

Matt Barry, head of capital markets at Touchstone Investments, says one reason for the explosion in active ETFs is an SEC ruling in 2019 that made it much easier for issuers to get in the game. The other significant reason for the trend, he says, is pure pent-up demand.

“If you look at the amount of active mutual fund assets, it's a giant pool of assets,” Barry said. “Combining the investors that appreciate the benefits of active management with the tax efficiency and the flexibility of ETFs make this a really compelling opportunity.” 

Barry expects the movement to continue in 2024 despite the fact that the field may be growing crowded.

“I think there's a long runway if you look at the percentage of assets in terms of the total ETF market,” he said. “Active ETFs are still a small percentage, with a lot of room to grow.” 

Barry’s firm, Touchstone, launched its first active ETFs two years ago and has since been increasingly active in the space. Known for its sub-advised “Distinctively Active” line of mutual funds and exchange-traded funds, Touchstone rolled out the Dynamic International ETF (TDI) last December. Barry defines “distinctively active managers” as those that take more concentrated positions.

“We've got seven actively managed ETFs right now,” he said. “We're looking to build out that roster. We don't have anything announced yet, but in particular in the international space, I think you'll continue to see us bring more products to market there.”