State Street Says Active ETFs Expected to Reach $260 Billion a Year

(Bloomberg) — After another torrent of inflows, actively managed exchange-traded funds appear poised to hit a record $260 billion this year, as investors look beyond traditional benchmarks to embrace alternative strategies , from options selling to cheap quantitative trading.

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Portfolio managers have put money into the active sector for 50 straight months following a $22 billion allocation in May, according to data compiled by Bloomberg Intelligence. Building on that momentum, State Street Corp., the third-largest ETF manager, projects that flows into actively managed ETFs could nearly double last year’s record $140 billion. And Morningstar Direct predicts that the total number of these ETF offerings will surpass passive offerings over the next three to five years.

So while the exchange-traded fund boom has gained a reputation as a mere index-tracking stream, the latest data highlights the industry’s evolution beyond its passive fame.

“This pace is unlike anything we’ve seen,” wrote Matthew Bartolini, head of SPDR Americas research at State Street Global Advisors, which oversees about $1.3 trillion in ETF assets, in a recent note to customers. Investors look to active ETFs to achieve returns above benchmarks and also to target specific market outcomes based on their risk tolerance, he said.

It’s early. While active funds have raked in about $107 billion this year, or 32% of all ETF flows, they still represent only 7% of the roughly $9 trillion in total ETF assets, according to BI data. But as investors large and small seek portfolio diversification, actively managed vehicles are expected to gain ground.

Assets are not necessarily flowing to traditional bond and stock pickers. Companies such as Dimensional Fund Advisors – the largest issuer of active ETFs – and JPMorgan Asset Management lead the way, accounting for nearly 40% of total active ETF assets. The former is known for its systematic funds, while JPMorgan has attracted liquidity with offerings such as ETFs that use options overlay strategies to generate additional yield.

“Over the past four years, we have seen some of the most significant innovations in active management in ETFs, particularly in equity and income strategies,” said Amrita Nandakumar, President, Vident Investment Advisory . “I don’t see this slowing down.”

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The catalyst for this sea change came in 2019, when the U.S. securities regulator approved a rule that accelerated the process of bringing an ETF to market. Nearly half of the more than 3,400 ETFs in the U.S. debuted after the rule was passed, and of those, 67% were actively managed, according to BI’s Athanasios Psarofagis.

This year, 168 actively managed ETFs hit the market, compared to 68 passive offerings, according to BI data. Active debuts have increased each year since 2020. Last year in particular saw a flurry of launches of single-stock ETFs and so-called buffer ETFs, intended to provide downside protection.

“With the passive side of the fence already crowded, it’s only natural that we’ve seen active ETFs start to proliferate,” said Ben Johnson, head of client solutions at Morningstar.

If regulators approve the so-called Vanguard patent that would allow an ETF to be listed as a share class of a broader mutual fund – thereby boosting the investment vehicle’s tax efficiency – This would open the floodgates to a new crop of active ETFs, Johnson said. There are currently over 2,000 passive ETFs on the market, around 500 more than active ETFs.

Of course, there are active ETFs that offer the traditional approach to stock and bond selection.

One example is the $1.6 billion T. Rowe Price Capital Appreciation Equity ETF (ticker TCAF), launched in June 2023 and overseen by portfolio manager David Giroux. The fund, which primarily invests in large U.S. companies such as Microsoft Corp. and Nvidia Corp., has recorded consecutive monthly entries since its inception.

“Some investors want someone to manage their funds despite the higher fees – if they believe in the manager – rather than taking a set-it-and-forget-it approach, at minimal cost,” said Mohit Bajaj, director of ETFs at WallachBeth Capital.

(A previous version corrected State Street’s classification in the second paragraph, assets in the fourth.)

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