The S&P 500 index is down more than 16% since January, leading to steep losses for many active mutual fund managers. Not surprisingly, globally, investors experiencing these losses have migrated to lower-cost passive funds, resulting in $640 billion in net outflows through June. With market declines, active fund assets fell nearly 20% to $23.9 trillion.
Active ETFs have proven the exception to the rule, with $51.8 billion in net inflows during the first half of the year. Moreover, with market declines, aggregate active ETF assets managed to climb just over one percent to $385 billion. While that’s just a fraction of the active mutual fund industry, the trend points to a monumental industry shift.
See our Active ETFs Channel to learn more about this investment vehicle and its suitability for your portfolio.
Following the Money
Domestic equities accounted for the most significant share of active ETF fund flows at $20.7 billion of net inflows. Meanwhile, global equities came in second place with just under $10 billion in net inflows, followed by commodities and domestic fixed income bringing in over $2 billion each. And about $1.47 billion went into alternative funds.
While Dimensional and ARK dominate domestic and global equities in assets under management, JPMorgan was the most successful domestic equity issuer in H1 2022. However, just half of the total inflow went to the top five issuers.
The most successful active ETFs by annual cash flow from 2017 to H1 2022 include:
- JPMorgan Equity Premium Income ETF (JEPI) – $5,848,000
- Investco Optimum Yield Diversified Commodity Strategy No K-1 ETF (PDBC) – $2,984,000
- First Trust Global Tactical Commodity Strategy Fund (FTGC) – $2,439,000
Part of a Larger Shift
The SEC’s ‘ETF Rule’ was the catalyst that began the transition from active mutual funds to active ETFs. By streamlining the process of bringing new ETFs to market, the regulatory agency opened the floodgates to hundreds of new ETF issues. As a result, investors have access to more strategies than ever before.
The SEC also approved non-transparent and semi-transparent structures in the same year. These new fund types enable active mutual fund managers to avoid disclosing their daily holdings, thereby letting them keep their secrets hidden. As a result, many prominent mutual fund managers began shifting to ETF structures.
In addition to keeping holdings under wraps, ETFs enable fund managers to reduce their tax burden. Generally, mutual funds must pay capital gains tax when they sell a position and when their fund has to sell to meet redemption requests. As a result, existing holders are penalized for redemptions made by previous holders.
Poised for Further Growth
Active ETFs will likely become even more popular over the coming quarters and years. With more active ETFs launching every month, investors will benefit from a better selection, and issuers will have to lower their costs to compete. These dynamics will create a win-win scenario for investors that accelerates adoption.
At the same time, many new active ETFs offer tactical strategies for institutional investors. Since ETFs have more liquidity than mutual funds, financial advisors and hedge funds can use them to implement complex strategies in different market conditions. These dynamics open the door to an entirely new market for issuers.
While active ETFs will never fully replace mutual funds or direct indexing, they still have a lot of room for growth over the coming quarters. As a result, investors should keep an eye on new launches and opportunities that might be a good fit with their portfolio or investment objectives.
The Bottom Line
Active mutual funds have experienced significant capital outflows since January amid a broader market decline. However, active ETFs have proven to be the exception to the rule, with $385 billion in capital inflows. Several factors are driving these trends and there’s no sign of these trends slowing over the coming year.
Take a look at our recently launched Model Portfolios to see how you can rebalance your portfolio.