What lies ahead for active ETFs?

What lies ahead for active ETFs?
Report highlights tailwinds from growing advisor awareness and cost benefits, as well as regulatory areas to watch.
FEB 06, 2024

Despite its limited profile in the investment fund landscape, the active ETF industry has seen remarkable growth in recent years – and the near term could prove to be a pivotal chapter in this Cinderella story.

According to a new report from ISS Market Intelligence, active exchange-traded funds have witnessed a surge in interest, reaching $422 billion in assets by mid-year 2023. This represents a significant jump, with these ETFs attracting $47 billion in net new flows in the first half of 2023 alone.

"The growth of active ETFs is particularly noteworthy, considering their starting point,” ISS Market Intelligence noted. “It's a testament to the evolving investor demand and the industry's adaptation to market needs.”

This expansion comes as asset managers are streamlining their offerings, leading to a record number of fund liquidations in 2020. But compared to passive ETFs and mutual funds, active ETFs have seen comparatively fewer liquidations, underscoring their resilience and growing appeal among investors.

The transition toward ETFs over the past decade has been stark, with ETFs now holding a 30% market share compared to mutual funds. That shift has been driven by a mix of advisor and investor awareness of ETFs' advantages, including tax efficiency, lower fees, and active management capabilities.

A significant number of financial advisors are increasingly integrating active ETFs into their portfolios, the report said, noting "Low fees and tax efficiency are the primary catalysts … with 63% of advisors citing cost as a key factor in their preference for active ETFs."

The report said more than three-quarters (77 percent) of advisors consider track record and performance among the top three quarters in selecting a new asset manager for active equity ETFs.

Younger advisors are leading the charge in adopting active ETFs, with those ages 30 to 39 planning to increase their usage significantly. This demographic shift indicates a broader change in investment strategies and preferences, potentially shaping the future landscape of fund management.

Regulatory decisions remain a critical factor in the trajectory of active ETF growth. The report pointed to several possible accelerating developments, including the possibility that the SEC could let other managers use the Vanguard ETF share class structure for active ETFs, along with a relaxation of regulations around allowable equity strategies.

While there’s still room to run in the active ETF space, asset managers looking to enter that blue ocean shouldn’t expect smooth sailing.

"There's a high fail rate for active ETFs, with about 70% of those launched in 2019 not reaching the $1 million mark in annual revenues by 2022," the report highlights. “Of course, that is a high hurdle in this environment, where attracting assets in any new product (regardless of vehicle) is extremely difficult.”

Commission-free annuity transactions are on the rise. Here's why

Latest News

Roughly three-fifths of Americans agree on higher taxes for large corporations, higher-income households
Roughly three-fifths of Americans agree on higher taxes for large corporations, higher-income households

Pew survey reveals slight majority consensus on tax rates, but views splinter based on political alignment and income levels.

The Fed's going to cut rates
The Fed's going to cut rates

While the Federal Reserve's decision to hold interest rates steady in March was widely expected, it's the reactions from financial professionals that provide a more nuanced picture of the central bank's approach.

Ontario Pension Fund revamps PE business in light of global risk
Ontario Pension Fund revamps PE business in light of global risk

The pioneering member of Canada's Maple Eight is stepping back from its go-it-alone private equity approach as a drought in deals and Trump's trade war prompt a rethink.

Raymond James, RBC reel in UBS advisors managing over $690M in assets
Raymond James, RBC reel in UBS advisors managing over $690M in assets

The firms' latest additions in Florida and Nevada come as a strategic change at UBS raises risk of advisor defections.

Assetmark debuts new advisor succession planning program
Assetmark debuts new advisor succession planning program

The new program offers opportunities and events structured for rookies, next-gen advisor leaders, and soon-to-exit veterans.

SPONSORED Beyond the all-in-one: Why specialization is key in wealth tech

In an industry of broad solutions, firms like intelliflo prove 'you just need tools that play well together'

SPONSORED Record growth: Interval funds emerge as key players in alternative investments

Blue Vault Alts Summit highlights the role of liquidity-focused funds in reshaping advisor strategies