Active Management in ETFs is Making a Comeback
There’s something quite remarkable occurring in a market traditionally ruled by index funds. Active management is re-emerging as a strong contender.
Recently, we saw some unusual trends in equity exchange-traded funds (ETFs). While there was a net outflow from equity ETFs totaling about $1 billion, it was interesting to note that most of those losses were on the index fund side. In fact, active equity ETFs attracted a $3 billion inflow, which balanced out the $4 billion that left the index funds, according to data from ETF Action.
Experts believe that actively managed ETFs are transforming the investment landscape in a way that could influence the market for years. This year has seen a record number of ETF launches—288 new funds—suggesting that we could see over 1,000 new ETFs by year-end. Currently, there are more than 2,000 active ETFs. While they constitute only about 10% of ETF assets, they have captured over a third of the inflows this year.
For the trading week ending April 25th, actively managed ETFs accounted for 34% of the $363 billion inflows.
“Actively managed ETFs are gaining traction,” noted Jon Maier, Chief ETF Strategist at JPMorgan Asset Management, during a recent appearance on ETF Edge.
JPMorgan offers a range of actively managed ETFs, including some high-demand income funds.
There are clear benefits for investors choosing ETFs, whether active or indexed. They provide tax efficiency and trading liquidity throughout the day while often maintaining low expense ratios. The ongoing popularity of active ETFs suggests that companies with traditional mutual funds might soon offer these types as well.
As Maier remarked, despite a different asset landscape, there’s a balance between active and passive funds, with index funds still holding a substantial portion of total assets this year.
Historically, active stock pickers have sometimes been labeled “closet indexers,” which suggests that they’re mirroring benchmarks rather than providing distinct portfolios. Identifying those funds that genuinely offer a unique approach is crucial for investors.
Mike Akins, a founding partner at ETF Action, mentioned that gauging the correlation with the overall market can provide insights into a fund’s active nature. Some ETF managers run “active by default” funds using specific quantitative strategies that boost performance while still being closely aligned with the underlying index.
Stay Calm in a Volatile Market
As more capital shifts to active strategies, it’s vital for investors to avoid knee-jerk reactions to market fluctuations. Many may have shifted their investments during the market downturn in early April, but as the week ended, stocks had rebounded significantly. The S&P 500 has managed to recover from losses sustained on April 2nd when significant global tariff announcements were made.
Bob Pisani, a CNBC Senior Market correspondent and “ETF Edge” host, advised, “Don’t panic trade during market turmoil. It’s a mantra I’ve shared for decades. Avoid making hasty decisions when the market is volatile.” Vanguard founder John Bogle encapsulated this sentiment perfectly: “Don’t do anything… just stand there.”
As investors decide on their method for market engagement, history shows that the best approach often involves maintaining investments, as recent weeks have shown fluctuations of down 5% and up 10%. “If you panic and sell during a dip, it can severely impact your long-term returns,” Maier explained. “It’s not about timing the market. While it can be tough, staying the course usually pays off.”
There are compelling reasons for the shift away from broad index funds, with macro trends encouraging more use of active ETFs. Innovative options, like buffer ETFs that offer income protection without significantly exposing investors to volatility, are increasingly favored by registered investment advisors managing multiple client portfolios.
The Active vs. Index Fund Debate
A surge in young retail investors is also adding to the momentum behind active strategies. Robinhood’s CFO reported strong user engagement during the first part of the year, with many customers making net purchases when the market dips. This speaks to a trend where younger investors are becoming more risk-tolerant.
Akins noted that this demographic tends to embrace riskier trading strategies, with around $10 billion flowing into leveraged and inverse ETFs focused on popular stocks like Tesla and Nvidia. “This isn’t institutional money. Retail investors primarily drive this trend,” he emphasized, pointing out that the majority of leveraged ETFs are owned by individual investors eager to take bold actions.
As ETF structures are increasingly adopted, it’s likely that there will be a gradual move towards active strategies across traditional asset classes. Akins anticipates that while index funds may dominate traditional investment strategies, there will be growing interest in risk-managed approaches that offer income opportunities and downside protection.
The current landscape is evolving, highlighting an ongoing competition between index and active strategies—a healthy dynamic for the investment world.
