Actively managed ETFs are “transforming the investment landscape.”
Just six years ago, actively managed ETFs were a rarity, as passively managed, index-tracking ETFs outnumbered them five to one.
But in recent years, particularly this year, there has been an explosion in actively managed ETFs, which are ETFs that are built and managed by portfolio managers rather than passively tracking an index, like the S&P 500.
According to a report from JP Morgan Asset Management, there are now more actively managed ETFs than passively managed ones, led by a major surge this year.
The report, from JP Morgan Chief ETF Strategist John Maier and ETF Strategist Shannon Ahern, found that approximately 81% of the 300 ETFs that have launched in the U.S. this year are actively managed.
Over the past 12 months, there have been 694 new active ETFs, representing 84% of all new ETFs. In April alone, 57 actively managed ETFs were introduced.
“In our view, the growth in active ETFs is a clear signal that a new era in ETFs is upon us-driven by shifting investor preferences as the market environment grows more complex,” the strategists’ wrote.
The most popular types of active ETFs
Investors’ increased desire for active ETFs is evident by the types of ETFs that are the most popular right now. The ETFs seeing the most issuance this year include defined outcome ETFs, also called buffer ETFs. These ETFs are structured to limit downside losses, often with capped upside. It shows that many investors have little appetite for the type of volatility we have seen.
Also popular are leveraged equity ETFs, which are far riskier than traditional ETFs. They are appealing to perhaps another segment of the marketplace, those seeking alpha in a difficult market. Leveraged ETFs amplify the gains – or losses – of an index by investing in derivatives or options. So, a 2X leveraged ETF would generate two times the gain of a benchmark, while a 3X leveraged ETF would generate 3X. But if the benchmark goes down, the losses would be amplified.
Along the same lines, derivative income ETFs are also gaining popularity. These ETFs use derivatives, including options and futures, and employ strategies like covered calls or puts to boost yield.
Finally, there has been a significant surge in digital asset ETFs, like those that invest in Bitcoin, cryptocurrencies, blockchain technologies, and other digital assets. Currently, according to JP Morgan, there are about 100 digital asset ETFs in the market, with some 75 more awaiting approval.
Maier and Ahern said these launches reflect two very different trends – the desire for income and reduced volatility on one hand, and the growing appetite for leverage/inverse and digital asset strategies.
Derivative income ETFs see most active ETF inflows
In the month of April, ETF assets increased by 0.55% to $10.5 trillion, according to JP Morgan. Approximately 64% of the $62 billion in April ETF inflows went into equity ETFs, while 22% went into fixed income funds.
Of the $62 billion in inflows, $22 billion went to active ETFs, with about 85% going into equities and about 11% into fixed income. At the end of April, active ETFs had $1.01 trillion in assets.
Year-to-date through April, $357 billion have flowed into ETF overall, with 39% of flows going into active strategies.
Among active ETFs, derivative income funds saw the most inflows in April, with about $4.5 billion. For the year, $18.8 billion in new funds have flowed into derivative income ETFs.
“Volatility is a friend to these strategies, and April was particularly volatile amid the tariff uncertainty. The VIX, peaking at 52, in April rivaled the volatility of the COVID-19 pandemic and the Great Financial Crisis,” the JP Morgan strategists wrote.
Also in April, active large-cap value ETFs saw $3 billion in flows in April, while large blend saw $2.5 billion in inflows. Further, active intermediate-term bonds saw $2 billion, while large-cap growth saw $1.6 billion.
For the year so far, derivative income, ultrashort bond, large blend and large value have accounted for approximately 40% of active flows.
