The growth of active ETFs shows no signs of slowing down, as asset managers large and small are shaking up an industry built on decades of passive investing. There were 68 active fund launches in the third quarter as of Sept. 22, compared to 49 indexed fund launches, according to CFRA. Several more active funds are launching this week, which pushes this period above the second-quarter levels and could potentially surpass the 78 new listings from the third quarter of last year. Passive funds still make up the majority of the ETF market, and they typically cost less than active products. Many of the largest passive funds track indexes like the S & P 500, which most active managers fail to beat on a yearly basis. Topping the market can be particularly difficult in a year like 2023, where a large portion of the returns were driven by just a handful of stocks. But the volatility of the market in recent years, including the steep declines of stocks and bonds in 2022, appears to have created an appetite among investors for active products that can generate income with less dramatic price swings. One of the newest funds to hit the market is the BlackRock Advantage Large Cap Income ETF (BALI) , which launched Thursday, fits this trend. “In the face of turbulent market conditions, we continue to see client demand for ETFs that can deliver consistent income and actively manage risk. Investors are increasingly looking for differentiated sources of income and growth for their portfolios, be it to fund a lengthy retirement or other longer-term financial goals,” Rachel Aguirre, U.S. Head of iShares Product at BlackRock, said in a statement to CNBC. What works The new BlackRock fund combines active management for picking dividend stocks with an options overlay designed to increase the income. This strategy is similar to the popular income products from JPMorgan — JEPI and JEPQ — which have raked in about $16 billion combined in new assets this year, according to FactSet, thanks in part to yields that have at times rivaled those of junk bond funds The success of these income-focused products, as well as so-called “defined outcome” or “buffer” funds, shows that active managers can win over clients without necessarily beating the market, at least in some environments. JEPI, the biggest active ETF, has underperformed the S & P 500 this year but is still attracting new cash. “One of the problems with straightforward active funds, and we do run some straightforward active funds, is that very often … you are tethered to that broad index, whatever happens to be in that. And so we do run a number of active funds that are focused on other outcomes, like income for example, so you’re not really trying to beat the Nasdaq or the S & P 500,” said Euan Munro, CEO at Newton Asset Management, a division of BNY Mellon. Other areas where active ETFs are finding traction include fixed income and international equities, suggesting investors may feel more comfortable paying up for an active manager in markets that are more opaque. “Particularly for our world, I think the ability to get an X-ray vision on what emerging markets mean is important,” said Cooper Abbott, CEO at Matthews Asia. Abbott’s firm launched five new active funds last week, including the Matthews Japan Active ETF (JPAN) . A new era? The growth in active funds is in part due to regulatory changes. The SEC eased restrictions around ETF launches in 2019, so some of the growth is from investors shifting from active mutual funds into active ETFs with similar strategies. “You’re seeing a lot more managers, including ourselves, curating through their capabilities to say what else would clients want to access in this vehicle and putting it out there. And so you’re seeing a fair amount of fund launches but a fair amount of take-up too from clients who already know the manager, they already know the capabilities, they just want to access it in this vehicle,” said Stephanie Pierce, the CEO of Dreyfus, Mellon & Exchange-Traded Funds at BNY Mellon Investment Management. If active ETFs prove to have staying power, it could be a way for asset managers to limit the financial damage from the long-term trend of investors moving from expensive mutual funds to low-cost passive funds. And the active fund space could bring in some high-profile managers, like Jeremy Grantham’s GMO, which filed an application for its first ETF last month. “I think the active ETFs are kind of the next iteration of recognizing the capabilities of the vehicle. Back in the day, the ETF 1.0 landscape was all passive. And then there was the 2.0, which was these factor-based sort of things. … and 3.0 is really bringing true active management,” Abbott said.
