Currently, the largest of these funds is the ARK Innovation ETF (ARKK), the flagship fund from ARK Investment Management, a boutique asset manager run by Cathie Wood. The fund raked in more than $15 billion in new investor cash in the past year to become the largest actively managed ETF in the U.S., according to ETF Database. ARK’s other active ETFs are also growing, buoyed by a $17.8 billion haul for the full year ended June 30.
While some investors have been swept up by the eye-popping gains of a few thematic funds, others are seeking safety in active management. Discretionary strategies that use options to limit exposure to stock market downturns have become an increasingly popular way for savers to stay in the stock market, according to reports. And companies sitting on piles of cash are snapping up ultra-short debt ETFs, trying to offset the zero-interest drag of money markets while minimizing the interest rate risk inherent in longer-term bonds.
“Investors out there finally get it,” said Ben Johnson, director of global exchange-traded fund research for Morningstar. “‘Active ETF’ is not an oxymoron. There are a number of funds that have enough of a track record to show they can deliver.”
Since the first ETF launched nearly three decades ago, the industry has grown in lockstep with the sort of index tracking strategies championed by the late Vanguard founder John C. Bogle. Bogle sometimes criticized the high fees charged by many mutual funds, whose stock pickers rarely outsmarted the market, according to MarketWatch. Bogle suggested that investors could, at times, be better off investing in inexpensive funds that mimic diversified benchmarks.
His idea caught on, accelerating in the wake of the financial crisis. In August 2019, assets in passive U.S. equity mutual funds and ETFs overtook active for the first time, according to Morningstar.
While that trend shows little sign of an outright reversal, active managers are clawing back some ground. To be sure, active ETFs remain a small piece of the $9.4 trillion global ETF industry, accounting for roughly 4.2% of assets, according to ETFGI, an independent research and consulting firm. But that may be changing. Worldwide assets in active ETFs have more than doubled since the end of 2019, ETFGI data show.
“This year is really the year that we’re seeing net flows into active pick up,” said Deborah Fuhr, founder and managing partner of ETFGI.
Asset managers have accelerated their active activity, staking out new territory in ETFs. In October, BlackRock’s iShares unit launched three new transparent actively managed ETFs, including offerings that provide unique exposure to remote work technology innovations.
Last year, the industry also saw the long-awaited debut of the first active non-transparent ETFs; there are now three dozen active non-transparent ETFs on the market. This year, firms such as Putnam Investments, T. Rowe Price and Fidelity Investments introduced ETF copycats of popular active mutual funds, including an ETF version of the $27 billion Fidelity Magellan fund. Vanguard, meanwhile, launched its first actively managed bond ETF.
In March, Guinness Atkinson Asset Management completed the first ever conversion of mutual funds into ETFs. Dimensional Fund Advisors followed suit in June, converting four actively managed mutual funds into ETFs, bringing over roughly $30 billion in assets. It was the largest conversion to date, and instantly made DFA one of the 15 largest ETF issuers. So far this year, actively managed ETFs account for nearly 66% of new ETF launches in the U.S., a record, according to data from Bloomberg (see Figure 2).
This year, BNY Mellon also plans to make ETFs from several fund companies available through its short-end investments platform, LiquidityDirectSM.
“Our clients are taking a more sophisticated view in terms of how they manage cash,” said Pierce. “I think we’re going to see more clients who used prime money markets in the past start to use ultra-short-term alongside, or in place of, prime funds.”
The very first ETF — the SPDR S&P 500 ETF Trust — debuted in 1993, but it took another 15 years before the first actively managed ETF reached the market.
After the 2008 Bear Stearns debut, other firms quickly followed suit. PowerShares, now part of Invesco, launched an active fixed income ETF as well as the first active equity ETFs.
Some 54% of respondents to a survey from J.P. Morgan and TrackInsight said they are invested in active ETFs today, up from 31% a year earlier, with 35% saying they would increase their exposure over the next few years (see Figure 3). The share of investors with an exposure of more than 20% to active ETFs has already risen from 4% to 14% (see Figure 4).
“I was surprised — I still am — how long it has taken for active [ETFs] to catch on,” said John Southard, co-founder of PowerShares Capital Management, and now co-founder and chief investment officer of Innovator, another ETF shop.
It wasn’t until PIMCO, a leading name in fixed-income investment management, launched an ETF version of its popular short-term debt strategy in 2009 that active ETFs gained real traction. The PIMCO Enhanced Short Maturity Active Exchange-Traded Fund, which trades under the ticker MINT, capitalized on post-crisis demand for higher yields.
“When PIMCO launched MINT, that was a game changer for active ETFs,” said Todd Rosenbluth, senior director of ETF and mutual fund research at CFRA, a research firm.
Like MINT, the most successful active ETFs piggybacked off the reputation of marquee managers like Bill Gross or Jeff Gundlach. When PIMCO introduced an ETF version of its Total Return Bond Fund in 2012, it was touted by CNN as “a litmus test for the actively managed ETF space.” The following year, State Street partnered with private equity firm Blackstone Group to launch the SPDR Blackstone Senior Loan ETF, an actively managed senior loan strategy. In 2015, State Street launched the SPDR DoubleLine Total Return Tactical ETF. The fund, managed by Gundlach’s DoubleLine Capital, was one of the fastest growing ETFs of the year.
MINT proved to be a long-lasting success, reigning as the largest active ETF on the market for more than a decade. Today, that honor goes to ARKK.