The Gradual Rise of Actively Managed ETFs

Only a few see big inflows; even Vanguard's offerings get little love from investors.

Actively managed exchange-traded funds may be the investment of the future, but investors are greeting them with all the enthusiasm of a four-year-old faced with Brussels sprouts.

Morningstar Inc. counts 247 actively managed ETFs in its database, and collectively, they have $54.9 billion in assets — pocket change in the $3.4 trillion ETF industry. So far this year through the end of April, investors have put about $8.3 billion into actively managed ETFs.

Even ETF giants such as The Vanguard Group have struggled to get investors to pay attention to their actively managed funds. Of the six active ETFs managed by the fund juggernaut, four have seen zero asset flows, according to ETF.com. (The four funds: Vanguard U.S. Liquidity Factor ETF (VFLQ), Vanguard U.S. Minimum Volatility ETF (VFMV), Vanguard U.S. Quality Factor ETF (VFQY) and Vanguard U.S. Value Factor ETF (VFVA).)

As with all ETFs, actively managed ETFs offer tax efficiency and intraday liquidity. The biggest successes in the sector have been intermediate-term bond ETFs, said Todd Rosenbluth, senior director of mutual fund and ETF research at CFRA.

“They have been very popular,” Mr. Rosenbluth said.

The $9.2 billion Pimco Enhanced Short Maturity Active ETF (MINT), for example, is the largest actively managed ETF; so far this year, it has seen an estimated $966 million in net new inflows, according to Morningstar.

One reason that actively managed ETFs could be unpopular is the fact that they are actively managed. Few active stock managers have beaten the broad market indexes during this bull market, and fund investors, particularly advisers, have been quick to figure that out.

In the past 12 months, investors have put just $20 billion into actively managed mutual funds and ETFs, according to Morningstar, while passively managed funds have welcomed $347 billion into their coffers.

And U.S. equity funds in general have been unpopular, which is one reason why active bond ETFs are seeing the most interest from investors. This year, domestic stock funds and ETFs have watched $64 billion flee, according to the Investment Company Institute, the funds’ trade group. In the meantime, bond funds and ETFs have welcomed $98 billion.

Will actively managed ETFs ever catch on? “Five or six years ago, I said actively managed ETFs were like the Chicago Cubs — it was always going to be next year for them,” said Ben Johnson, director of global ETF research at Morningstar. “Now the Cubs have won the World Series, but active ETFs are just a small fraction of ETF assets.”