According to data provider ETFGI, assets in actively managed exchange-traded funds (ETFs) reached a record $1 trillion globally at the end of August, driven by a rush of new product innovation and more lenient rules.
The goal of active exchange-traded funds (ETFs) is to beat benchmarked indexes such as the Russell 1000 Growth Index, the Nasdaq 100, and the S&P 500. The first ETF went live in 2008 thanks to a launch by Bear Stearns.
In the most recent episode of Inside ETFs, Matthew Bartolini, head of SPDR Americas Research at State Street Research, told Reuters that although active ETFs make up just 7% of all global ETFs, they have been responsible for 30% of all inflows into the funds overall over the last several years.
The 2019 rule, also referred to as the “ETF rule,” which simplified the difficult process of receiving clearance for active ETFs from the U.S. Securities and Exchange Commission, was cited by experts as a major growth stimulus. Based on data from ETF.com, assets in the active ETF category have increased by around ten times since 2019.
This year has seen continued growth. ETFGI data showed that as of August 31, active ETF assets had increased by 42%.
According to Bartolini, the looser rules have also spurred innovation, pushing issuers to develop cutting-edge strategies for their products in a competition for investor capital.
Active exchange-traded funds (ETFs) range from basic options like the BlackRock Large Cap Value ETF (BLCV.P), opens new tab, to more specialized ones like the AdvisorShares Vice ETF (VICE.P), opens new tab, which invests in stocks of businesses in the cannabis, alcohol, and cigarette sectors.
According to Bartolini, “some of the most innovative ideas that ETF issuers can bring to the marketplace have actually been hastened by these regulatory regulation changes.”
The highly volatile Ark Innovation ETF (ARKK.P), opens new tab, which surged 152% in 2020 before plunging 23% the following year, is one example of an active exchange-traded fund (ETF). It has lost 9.74% of its value thus far in 2024, while the S&P 500 has gained 20%. Certain ETFs, such leveraged ones linked to the performance of specific equities, like Nvidia, can potentially increase risk.
Not all current ETF issuers are doing well either.
A Morningstar survey earlier this year stated that 75% of active ETF assets were held by the top 10 issuers. Just 3% of all the assets in the group are held by the bottom half of active equity ETFs.
According to a report released on Tuesday by Morningstar’s Jack Shannon, manager research analyst, “ETFs that repackage old-fashioned stock-picking have struggled to attract assets.”
According to Tim Huver, senior vice president of ETF Servicing at Brown Brothers Harriman, investors may need to conduct further research before investing in active ETFs. Still, he thinks the genre has entered a new phase.
More than 90% of ETF investors planned to raise their allocation to active ETFs, according to a Brown Brothers survey, according to Huver.
Huver stated, “I believe the second trillion will arrive far faster than it took us to get to the first trillion.”
