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Actively managed exchange-traded funds are a growing trend in the investment space.
In that regard, investors have been pulling money out of active mutual funds and seeking out actively managed ETFs in recent years. Investors withdrew about $2.2 trillion from active mutual funds from 2019 to October 2024, according to Morningstar data. At the same time, it added about $603 billion to active ETFs.
According to Morningstar, annual inflows to active ETFs will be positive from 2019 to 2023, and will reach a positive pace in 2024. On the other hand, active investment trusts posted losses in all but one year (2021). We saved $344 billion in the first 10 months of 2024.
“got it [active ETFs] “This is a growth engine for active management,” said Brian Armour, North American passive strategy research director at Morningstar.
“It’s still in the early stages,” he said. “But there are some bright spots in an otherwise cloudy market.”
Broadly speaking, mutual funds and ETFs are similar.
These are legal structures that hold investors’ assets. But experts say investors have gravitated toward ETFs in recent years because they offer cost advantages compared to mutual funds.
Why are fees important?
Active fund managers actively select stocks, bonds, and other securities that are expected to outperform market benchmarks.
This active management is generally more expensive than passive management.
Passive investing, as used in index funds, essentially replicates the returns of a market benchmark such as the S&P 500 U.S. stock index, requiring less manual effort from asset managers. As a result, fees are generally lower.
The average asset-weighted expense ratio for active mutual funds and ETFs in 2023 was 0.59%, compared to 0.11% for index funds, according to Morningstar data.
Data shows that active managers tend to perform worse over the long term than their index fund peers once fees are taken into account.
For example, about 85% of large-cap active mutual funds have underperformed the S&P 500 over the past 10 years, according to S&P Global data.
As a result, passive funds have attracted more annual investor capital than active funds over the past nine years, according to Morningstar.
“The last few decades have been tough for actively managed mutual funds,” said Jared Woodard, investment and ETF strategist at Bank of America Securities.
But for investors who prefer active management, especially in more niche areas of the investment market, active ETFs often offer cost advantages over active mutual funds, experts say.
Experts say the main reason for this is lower fees and tax efficiency.
ETFs typically have lower fund fees than comparable mutual funds and charge investors much less taxes each year, Armor said.
In 2023, 4% of ETFs distributed capital gains to investors, compared to 65% of mutual funds, he said.
These cost advantages are contributing to the ETF’s overall rally. ETFs’ market share of mutual fund assets has more than doubled over the past decade.
However, active ETFs account for only 8% of total ETF assets and 35% of annual ETF inflows, Armor said.
He said, “Although it accounts for a small portion of active net assets, it is growing rapidly despite significant outflows from active investment trusts.” “So, that’s a big story.”
Exchange investment trusts for ETFs
In fact, experts say many asset managers are converting active mutual funds into ETFs in accordance with the Securities and Exchange Commission’s 2019 rules that allowed such activities.
To date, 121 active mutual funds have become active ETFs, according to a Nov. 18 research note from Bank of America Securities.
Such a shift “could stem the flow of outflows and attract new capital,” according to a Bank of America memo. “Two years before the conversion, the average fund was $150. [million] Outflowing. After conversion, the average fund gained $500 [million] of influx. ”
That said, there are some caveats for investors.
As an example, investors who want active ETFs are unlikely to be able to access them within their workplace retirement plans, Armor said.
Armor said that unlike mutual funds, ETFs cannot reach new investors.
This could put investors at a disadvantage in ETFs with certain “ultra-niche and focused” investment strategies, he said. That’s because while ETFs may attract more investors, asset managers may be unable to implement their strategies.
