The Rise of the Active ETF In the U.S.

2023 witnessed a landmark year for Exchange Traded Funds (ETFs) in the U.S. A record-breaking 510 new ETFs were launched, surpassing any previous year in the last decade.

However, a significant portion of this growth in the U.S., over 68% came from actively managed options.

This trend stands in contrast to the initial image of ETFs as predominantly passive, investment vehicles.

Active Australian ETFs are a different story

Active ETFs account for 15% of Australia’s ETF assets under management (AUM).

Over 90% of this amount has come from the conversion of existing unlisted active funds to the ETF structure. The remaining 10% comes from net flows.

Despite the growth in the category in the past year in the U.S. widespread adoption of active ETFs in Australia has been slower to happen.

We predict an increase in actively managed ETFs to market as conversion activity gathers a pace of unlisted managed funds into Active ETFs.

Currently, there are under 100 active ETFs actively trading on Australian exchanges out of 365 in total. The popularity of passively managed ETFs is understandable given the low fee structures.

What is behind the surge in U.S. Active ETFs

The surge in ETF launches reflects a maturing market brimming with innovation. ETFs have become a popular choice for investors due to their inherent advantages.

They offer diversification, transparency, and intraday liquidity, often at lower costs compared to traditional mutual funds. This has attracted a wider range of investors, leading to a constant demand for new and specialized products.

Active vs. Passive: A Blurring of Lines

The dominance of actively managed ETFs in 2023 marks a shift in the industry. Originally, ETFs were seen as a way to passively track indexes, offering broad market exposure.

However, the landscape is evolving. actively managed ETFs aim to outperform the market by employing human portfolio managers who make investment decisions based on research and analysis.

Several factors contribute to the rise of active ETFs. Firstly, the increasing complexity of financial markets makes it challenging for passive strategies to consistently outperform.

Active managers believe their expertise can navigate these complexities and identify undervalued opportunities.

Secondly, technological advancements have empowered active managers with better data analysis tools and faster execution capabilities. This allows them to compete more effectively with passive options.

Challenges and Considerations

Despite the rise and trend of active ETFs, some concerns remain.

Active management typically comes with higher fees compared to passive options.

Investors need to carefully evaluate the track record and experience of the management team before investing in an actively managed ETF. Yet, past performance is no guarantee of future results.

As well a bull market in equities can tend to ‘obscure’ outperformance versus a rising tide lifting all boats.

Looking Ahead

The record-breaking year for U.S. ETF launches in 2023, particularly the surge in actively managed options, highlights a dynamic and evolving market.

Investors now have a wider array of choices than ever before.

In Australia, the trend of conversion of unlisted funds to ETFs may only be getting started.


JustStocks Advisor
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