With some exceptions, the largest actively managed equity exchanged-traded funds have taken on the attributes of index ETFs: broadly diversified portfolios that fit neatly into a global asset allocation model.
Many of those offerings, launched over the last few years from primarily Dimensional Fund Advisors LP and American Century Investments' Avantis Investors, had a running start with high brand recognition or widely known executives.
Where active equity ETFs are venturing now, however, is down the more challenging path blazed by ARK Investment Management LLC. ARK's high-conviction, high-visibility approach drove outsized returns (and drawdowns) and flows into and out of the flagship $7.7 billion ARK Innovation ETF, or ARKK. The fund itself was so volatile that another ETF issuer, AXS Investments LLC, launched a daily inverse ETF on ARKK.
Among those taking this more focused approach to active ETFs are Capital Group, T. Rowe Price Group Inc., and other traditionally active fund brands. As active mutual funds continue to see outflows, the specific challenge for active equity ETF issuers is to show that high-conviction, bottoms-up, risk-managed ETFs have a place in institutional portfolios alongside, or even replacing, hedge fund or activist strategies with higher management and performance fees.
Todd Sohn, managing director, ETF and technical strategy for Strategas Securities LLC in New York, has spent years looking at active ETF offerings. "What problem is being addressed and where can active management add value?" Mr. Sohn said. And at what cost? "Most of the largest active equity funds all have expense ratios between 20 and 40 basis points," he said.
Through May 31, U.S.-listed active equity ETFs saw net inflows of $30 billion and total assets hit $199.4 billion across 510 products, excluding leveraged and inverse funds. Total flows into active equity ETFs in 2022 were $68 billion, according to CFRA Research.
Except for a handful of ETFs launched in conjunction with large institutions, most ETFs build an asset base through retail and intermediary adoption and reach the institutional market only after establishing a track record and asset level that passes muster with boards and investment committees. Those track records are still being built: 301, or 59%, of active equity ETFs tracked by CFRA were launched after 2020.
"We are seeing growing comfort by active managers to offer their solutions in the more transparent, tax efficient ETF wrapper," said Bryan Armour, director of passive strategies research for Morningstar Inc. in Chicago.