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Exchange-traded funds are generally known for their passive strategies. But experts say actively managed ETFs are proliferating as investors seek lower costs and greater accuracy.
At the beginning of 2019, active ETFs represented just over 2% of the U.S. ETF market, but these funds have since grown. 20% or more every yearAccording to Morningstar, its market share will rise to more than 7% in 2024.
The 328 active ETFs include: Released in 2024 Steven Welch, senior manager research analyst at Morningstar, noted the ETF's growth this year, calling it “in some ways remarkable” for the ETF through September compared to 352 in 2023.
Experts say there are several reasons for the strong growth of ETFs.
Welch said the U.S. Securities and Exchange Commission issued ETF rules in 2019 that “streamlined the approval process” and made it easier for portfolio managers to create new ETFs.
Meanwhile, investors and advisors are increasingly shifting to lower-cost funds. Additionally, mutual fund providers tend to convert your funds into ETFs.
Still, only a small number of issuers are finding success in the active ETF market. Top 10 publishers Manage 74% of assetsAs of March 31, according to Morningstar. As of October, 40% of active stock ETFs He had assets of over $100 million.
The “biggest thing” to look at is the health of active ETFs, Welch explained, warning investors to “stay away from ETFs that don't have a lot of assets.”
Active ETFs enable “tactical adjustments”
Passive ETFs replicate an index. S&P500Active managers aim to outperform specific benchmarks. Like passive ETFs, active versions are typically more tax-friendly than similar mutual funds.
“Active ETFs allow managers to make tactical adjustments,” says John Ullin, a certified financial planner and managing principal at Ullin & Company Wealth Management in Boca Raton, Florida. “They may be able to weather market volatility more smoothly than passive indices.”
These funds can also offer “more unique strategies” compared to the traditional index space, he said.
average Active ETF fees are 0.65%That's 36% cheaper than the average mutual fund, according to a Morningstar report released in April. However, the asset-weighted average expense ratio is Passive funds were 0.11% In 2023.
But many active managers are unable to beat their benchmarks, leading to potential underperformance, Ulin said. Additionally, some active ETFs are newer and may have less performance data to see how they are performing.
