Actively managed exchange-traded funds (ETFs) have become increasingly popular in recent years after passively managed funds came to dominate the market a decade ago. While most investors remain better off with passive funds, there are some pockets of opportunities and reasons investors may want to consider some active exposure.
Let’s look at why actively managed ETFs are increasing in popularity and where investors can find outperformance.
See our Active ETFs Channel to learn more about this investment vehicle and its suitability for your portfolio.
How Are Active Funds Performing?
Actively managed funds have become increasingly popular. In fact, capital outflows from active funds fell to their slowest pace since 2014, according to Barron’s that quoted a Bank of America report. While only 48% of active funds beat their Russell index benchmarks through July, it was the best showing in four years, and savvy stock pickers have done exceptionally well.
According to S&P’s SPIVA U.S. Scorecard, actively managed funds continued to underperform passively managed funds in 2020. While the market disruption should have created numerous opportunities for outperformance, researchers found 57% of domestic equity funds lagged the S&P Composite 1500 during the year.
The takeaway is that actively managed funds tend to underperform benchmarks on the whole, but there are pockets of opportunities where investors may be able to find alpha. Some investors are already trying to target these opportunities, evidenced by the record $88.23 billion in net inflows to actively managed ETFs and ETPs through July 2021.
Where Investors Can Find Alpha?
The S&P SPIVA Scorecard identified several broad fund categories where actively managed funds outperformed their benchmarks. In particular, the pandemic favored growth over value, translating to 62% of large-cap growth, 83% of mid-cap growth, and 86% of small-cap growth funds topping their benchmarks, although long-term performance is mixed.
The top-performing categories last year included:
- Small-cap Growth Funds (13.7% Underperformed)
- Mid-cap Growth Funds (17.2% Underperformed)
- Real Estate Funds (24.7% Underperformed)
In some cases, top-performing, actively managed funds didn’t neatly fall under a benchmark index. While they typically maintain a benchmark index for comparison purposes, they adjust sector allocations or time trades to capitalize on specific themes. For example, a fund may try to capitalize on yield regardless of sector or asset class.
Some of the top-performing active ETFs this year to date include:
| Ticker | Name | YTD Return | 3-Year Return | Expense Ratio |
|---|---|---|---|---|
| OILK | ProShares K-1 Free Crude Oil Strategy ETF | 49.44% | -49.04% | 0.68% |
| AMZA | InfraCap MLP ETF | 47.53% | -25.05% | 2.01% |
| BLOK | Amplify Transformational Data Sharing ETF | 39.42% | 157.31% | 0.71% |
| SYLD | Cambria Shareholder Yield ETF | 35.38% | 60.49% | 0.59% |
| MGMT | Ballast Small/Mid Cap ETF | 33.82% | N/A | 1.10% |
*Data as of September 15, 2021.
Looking Beyond Returns and Yield
Most investors don’t look at returns in a vacuum.
For example, Bitcoin has produced spectacular returns, but the cryptocurrency also has tremendous volatility. As a result, risk-adjusted returns for cryptocurrency-focused funds may be far lower compared to funds dealing with traditional asset classes. There are also other considerations like taxes or expenses to keep in mind when calculating the overall benefit.
Many investors looking beyond yield have turned to smart beta funds—a hybrid between actively and passively managed funds—as a way to achieve their goals. For example, low volatility smart beta funds invest in an index that’s weighted based on volatility metrics rather than just market capitalization, yielding a less volatile portfolio.
Want to generate high income without undertaking too much risk? Check out our complete list of Best High Yield Stocks.
In other cases, investors may be interested in actively managed funds for environmental, social, or governance (ESG) benefits. For example, Engine No. 1’s Transform 500 ETF (VOTE) invests in 500 of the largest U.S. public companies but focuses on actively influencing companies to hold them accountable for ESG issues and affect change.
The Bottom Line
Passively managed ETFs continue to outperform actively managed ETFs on the whole, but there are pockets of outperformance and other areas where investors are looking beyond simple returns. In these instances, investors may want to consider actively managed ETFs to help reach their goals while keeping in mind added taxes and expenses.
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