The Rise of Actively Managed ETFs

Actively managed exchange-traded funds have grown significantly in the number of products offered and assets under management over the past year, and continue to gain popularity as an investment vehicle.

As active ETFs continue to attract greater attention and accumulate more investment dollars, they will start competing with traditional active mutual funds for market share, according to a paper released Tuesday.

To better understand the potential of the active ETF segment, SEI collaborated on the study with ETF Trends to assess the current environment as well as their advantages and the obstacles they face.

Actively Managed ETFs

The paper noted that although actively managed ETF assets under management and number of products are growing, they still make up less than 1% of the global market for ETFs today — as of March 31, 85 products controlled $15 billion of assets out of the global ETF total of $2.7 trillion.

These vehicles come with an innate creation/redemption process that allows for a potentially more tax-efficient product than mutual funds.

Actively managed ETFs are required to make daily disclosures of holdings, yet some providers have petitioned the SEC to increase the time interval beyond daily disclosures.

However, some active managers want to shield their portfolio decision-making from copycats, and now may have a tool in an innovation called exchange-traded managed funds, which are wending their way through the SEC approval process.

Active ETFs now more broadly utilize derivatives, enabling fund sponsors to expand to other asset classes. The paper said it expected more competition between actively managed ETFs and other products utilizing various alternative investment strategies and asset classes, such as commodities or foreign currencies.

The paper noted that active ETFs are now being developed by more traditional mutual fund-only providers, such as T. Rowe Price, Fidelity Investments, Franklin Resources, Janus Capital Group and Columbia Management Investment Advisers, rather than just by specialist ETF manufacturers.

They are also adding support to the passive indexing providers through tracking “enhanced” indexes that screen for specific stocks.

The Road Ahead

While the actively managed ETF space is still in its nascent stages, active management may represent the next growth phase in the ETF industry, according to the paper.

New product launches have helped propel active ETF flows and total assets, but whether this momentum will continue remains to be seen.

The authors see wind to the industry’s back in the move from fixed-income-only offerings to balanced, alternative and even equity-focused funds.

The SEC’s lifting of restrictions on derivatives in active ETFs may prompt a new wave of active offerings, adding wind to the industry’s back and helping support the move from fixed-income-only offerings to balanced, alternative or even equity-focused funds.

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Check out ETF-Mutual Fund Hybrid: The Next Big Thing? on ThinkAdvisor.