Wall Street asset managers are betting on actively managed exchange-traded funds to help grow revenue and protect profits, but the space is evolving differently than the traditional stock-picking business. ETFs have traditionally been associated with low-cost passive management, and the vast majority of money in the space is held by these general funds. But as of November, active ETFs accounted for 27% of net inflows and 77% of new ETF launches in 2024, according to data from JPMorgan Asset Management. Many industry experts point to the SEC’s 2019 rule changes as the beginning of this shift. As active management has proven viable in ETF wrappers, asset managers have been launching their own ETF businesses or converting their mutual funds into new wrappers. “ETF conversions can curb outflows and attract new money. So far, 121 active mutual funds have become active ETFs. In the two years before the conversion, each fund experienced an average outflow of $150 million. After the conversion, each fund Still, if asset managers can achieve sustainable success with these funds, it could help them retain some of their fees after years of seeing them get crushed by passive rivals. Revenue. Active investing is expected to continue in 2025, said Johan Grahn, chief ETF market strategist at Allianz Investment Management: “The market itself is very clearly in favor of active management in ETF wrappers. Strategy. “The Role of Active ETFs The rise of active ETFs isn’t a carbon copy of old-school stock picking. In fact, some of the most successful products are trying to offer something different, rather than just trying to beat the S&P 500. Dak Stock Premium Gains ETFs (JEPQ). These funds have a stock-picking component, but the income generated through option trading is a key part of their appeal. Many buffer funds from multiple different issuers that continue to grow rapidly also qualify as active funds. These income and so-called fixed outcome products essentially use derivatives to narrow down a fund’s possible outcomes and then sell that extra certainty to investors. “The industry has been looking for ways to challenge passivity, with little success. Now you basically have a modification of passive where you can plug and play based on your goals, which I think is just a game changer for active,” said Matt Collins, director of ETFs at PGIM Investments. There are other types of active stock ETFs that have found success. For example, the iShares US Equity Factor Rotation Active ETF (DYNF) was the most popular fund with inflows this year, with more than $11 billion in inflows, according to FactSet. The ETF is designed to identify and capture trends in quantitative factors, rather than just looking for long-term winners, and much of its success has come from being part of BlackRock’s model portfolios, which can complement, but not necessarily completely replace, core passive funds. “The most successful active switches offer differentiated market access or strategies with fewer ETF competitors, including ‘quant’ equities, high-yield fixed income, thematic funds and options strategies,” Woodard wrote. Potential growth areas An efficient active ETF type is important for fund issuers, as strategies that are difficult to replicate can incur higher fees and avoid the “race to the bottom” seen in passive funds. One area where Wall Street sees huge potential for active ETFs is fixed income, but has lagged behind equities in the shift to ETFs. The complexity of bond investing and the structure of the old mutual fund world suggest Active has plenty of room to grow, said Jon Maier, chief ETF strategist at J.P. Morgan Asset Management. “The entire fixed income market is probably 75% active. But the ETF space is not — it’s basically passive,” Meyer said. One success story in active fixed income this year is the Janus Henderson AAA CLO ETF (JAAA), which has brought in about $11 billion this year, according to FactSet. The fund’s year-to-date total return as of Dec. 26 was 7.3%, well ahead of broad bond market indexes. The artificial intelligence industry is another area where some see opportunities for aggressive stock picking, as the trend doesn’t fit neatly into any existing industry category and is expected to change as the technology continues to evolve. One fund that has had some success in this space is the AB Disruptors ETF (FWD), which owns Nvidia and Vistra Corp. It is one of its largest holdings. The fund outperformed the Nasdaq 100 in 2024 and generated more than $200 million in inflows. “I think what’s attractive to people about this particular exposure is that it’s not just deep into one particular theme,” said Noel Archard, global head of ETFs at AllianceBernstein. — CNBC’s Michael Bloom contributed reporting.
The active ETF craze is expected to continue in 2025. | Real Time Headlines
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