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Active ETFs Not An Oxymoron

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Todd Rosenbluth
·6 min read
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Key Takeaways

Fundamental Context

ETFs are not just for investors who want to passively replicate an index. While $200 billion of active ETF assets represents just 3.5% of assets in the U.S.-listed ETF market, according to CFRA’s First Bridge ETF database, these funds pulled in 14% of the net inflows in the year ended Feb. 4.

Historically, fixed income products were the driver of the active universe, but the tide shifted in the past year, driven in part by the success of equity funds run by Ark Funds.

Indeed, while equity ETFs currently comprise just 37% of the active ETF asset base, these offerings pulled in 54% of the net inflows in the past year. Fixed income funds gathered $29 billion, or 40% of the cash haul. Other asset categories tracked by CFRA pulled in the remainder of the active flows.

 

Breakdown Of Actively Managed ETFs

Source: CFRA’s First Bridge ETF database. As of Feb 4, 2021.

 

Despite the recent success, active equity ETFs represent just 1.6% of the overall equity ETF category’s asset base, as index-based funds such as the iShares Core S&P 500 ETF (IVV) and the Vanguard Total Stock Market ETF (VTI) remain dominant. In contrast, active fixed income ETFs represent a larger 10% of the smaller asset category.

Moving Up In The Ranks

ARK is climbing the leader board for active ETFs and the broader industry. In the past year, ARK pulled in $31 billion in new money overall, fourth most overall behind the three largest asset managers, but ahead of larger firms such as Invesco and Charles Schwab. The firm manages $50 billion in active ETFs, led by $25 billion ARKK, which provides exposure to a range of long-term themes.

However, the more targeted ARK Genomic Revolution ETF (ARKG) and ARK Next Genration Internet ETF (ARKW) have $12 billion and $7.4 billion in assets, respectively. All three funds more than doubled in value in the past year, which has unsurprisingly led to further investor interest. CFRA believes ARKK and ARKW remain positioned to outperform the respective broader equity asset category over the next nine months, while we think ARKG is more than likely to lag.

According to CFRA, ARK was the ninth largest ETF provider, recently jumping ahead of ProShares and WisdomTree in the league table.

Known more for index ETFs, First Trust is the second largest active ETF provider. The firm manages $35 billion of active ETFs, which represented 30% of its overall ETF asset base.

First Trust’s largest active ETF, LMBS, invests primarily in investment-grade mortgage-related debt securities. The $6.8 billion ETF pulled in $2.1 billion in the past year. Meanwhile, the First Trust Preferred Securities & Income ETF (FPE), classified as a multi-asset/other fund by CFRA, gathered $655 million in new money to hit $6 billion in assets.

These and other active First Trust ETFs are catching up to the issuer’s largest ETF, the First Trust Dow Jones Internet Index Fund (FDN), an $11 billion fund with $1.5 billion of net outflows in the past year. First Trust also offers a suite of actively managed defined outcome ETFs focused on the equity market.          

 

Largest Providers of U.S.-Listed Active ETFs

 

Other Leading Active Issuers

Active fixed income is driving PIMCO’s success, while J.P. Morgan’s ETF presence is more diversified. PIMCO’s $21 billion actively managed ETF business makes up 78% of the firm’s overall ETF assets, with MINT and the PIMCO Active Bond ETF (BOND) combined managing $19 billion of assets.

MINT is an ultra-short product appealing to investors seeking more income than money market funds. Meanwhile, BOND is a core fixed income product modestly outperforming the index-based iShares Core U.S. Aggregate Bond ETF (AGG) in the three-year period ended Feb. 4.

JPST is a peer of MINT, and is J.P. Morgan’s largest ETF, with $16 billion in assets. However, active ETFs represented 40% of the firm’s ETF assets.

Other popular active products include the JPMorgan High Yield Research Enhanced ETF (JPHY) and the JPMorgan Ultra-Short Municipal Income ETF (JMST), with CFRA favoring JPHY’s higher reward potential despite elevated credit risk.

Meanwhile, J.P. Morgan also has a strong suite of low-cost index-based international equity ETFs, such as the JPMorgan Betabuilders Canada ETF (BBCA) and the JPMorgan BetaBuilders Japan ETF (BBJP) that gained traction despite being less than three years old.

The fifth largest active ETF provider is BlackRock, which manages approximately $12 billion in such assets. The BlackRock Ultra Short-Term Bond ETF (ICSH) is the largest active ETF, with $5.2 billion. Though the firm offers nearly two dozen active ETFs, active products represent just 1% of the firm’s ETF assets.

Conclusion

The future is bright for active ETFs. In 2020, many large asset managers launched initial active equity ETFs. These included the American Century Focused Dynamic Growth ETF (FDG), the Dimensional US Core Equity Market ETF (DFAU), the Fidelity Blue Chip Value ETF (FBCV), the Invesco Focused Discovery Growth ETF (IVDG), and the T. Rowe Price Blue Chip Growth ETF (TCHP).

These firms join Davis Advisors, Franklin Templeton and Principal Financial Services in offering active equity products. While the assets in these ETFs remain modest, we think they will have appeal to mutual fund investors seeking a more tax efficient alternative.

Actively managed ETFs have punched above their weight in the past year, opening many investors’ and advisors’ eyes to the fact that ETFs do not need to be index based.

While many investors are likely to remain loyal to a low-cost, index-based product tied to the S&P 500 or the Bloomberg Barclays Aggregate Bond index, a growing number of believers in active management are moving away from mutual funds or managing their own individual security baskets.

 

All of the views expressed in this research report accurately reflect the research analyst's personal views regarding any and all of the subject securities or issuers. No part of the analyst's compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this research report. For more information and disclosures, please refer to CFRA's Legal Notice at https://www.cfraresearch.com/legal/.

Copyright © 2021 CFRA. All rights reserved. All trademarks mentioned herein belong to their respective owners.

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