The number of active ETFs has doubled over the past two years, accounting for nearly 60% of new funds. At the same time, active ETF assets under management more than tripled thanks to the success of Cathy Woods’ ARK Innovation ETF (ARKK) and others. These trends show no signs of slowing in 2022 as investors look for better alpha.
Let’s take a look at three active ETF trends that investors should watch for in 2022 and what they mean for your portfolios.
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1. Shifting Investor Perception
At present, active ETFs make up less than 5% of the $7 trillion industry, but they account for an outsized percentage of new assets. Investors continue to flock into active ETFs to take advantage of their lower costs and improved liquidity. With the recent stock market volatility, active managers have had a chance to deliver better risk-adjusted returns.
Volatility is likely to continue into 2022, meaning active managers could continue to shine. As a result, investors will likely continue their migration to active ETFs as a way to lower fees, buy and sell anytime, and access strategies to better manage volatility. But, of course, the most successful active ETFs in 2022 may differ from the winners in 2021.
2. Mutual Fund Conversions
Mutual funds largely sat out the first wave of active ETFs, but Fidelity, T. Rowe Price, Franklin Templeton, and American Century launched active ETFs in 2021. While many fund managers worried that transparent ETFs would enable anyone to copy their strategies, the SEC allowed new structures in 2019 to forgo daily disclosure rules.
These trends will continue into 2022. JPMorgan and other fund managers announced plans to convert their existing mutual funds into active ETFs to take advantage of tax benefits and shifting consumer preferences. A new SEC rule change making semi-transparent ETFs more tax-efficient could further accelerate these trends by removing another barrier to adoption.
3. New Thematic Funds
Retail investing is in vogue once again, accounting for about 20% of average daily equity volume in the U.S. GameStop and other meme stocks underscored the power of the masses. At the same time, the ARK Innovation ETF’s success highlighted the role of active ETFs in helping individual retail investors outperform traditional advisors.
Many investors are drawn into thematic funds that offer exposure to a particular industry. While ESG was one of the most popular themes in 2021, new active ETFs will expose investors to new and exciting corners of the market. For example, newly launched active ETFs cover areas like the future of food and artificial intelligence.
Should You Invest?
Active ETFs offer a compelling opportunity for investors to access new strategies and generate alpha, particularly in today’s volatile market. In fact, investing icon Peter Lynch recently said that passive investors were missing out on outsized returns from active managers. Many other high-profile investors mirror these sentiments, too.
That said, investors should avoid selling mutual funds in taxable accounts to transition to an ETF because they would incur a significant tax liability (retirement accounts are exempt). Investors should also be aware of active ETF expense ratios, which tend to vary quite a bit between funds and could eat into long-term after-tax returns.
Take a look at our recently launched Model Portfolios to see how you can rebalance your portfolio.
The Bottom Line
Active ETFs had a spectacular year in 2021, and they could have another successful year in 2022. More conventional investors will be drawn to active ETFs as the mutual fund industry converts funds, while thematic funds will attract retail investors. With lower fees and potential outperformance, it’s a win-win for investors and asset managers.
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