Active ETFs Hit $1 Trillion Milestone: What This Means for Investors and Markets
By Suzanne McGee
(Multibagger) - The global assets in actively managed exchange-traded funds (ETFs) have skyrocketed to an unprecedented $1 trillion by the end of August, according to data from ETFGI. This surge has been driven by relaxed regulations and a wave of innovative products.
Active ETFs: Outperforming Benchmarks
Active ETFs aim to outperform their benchmark indexes, such as the S&P 500, Nasdaq Composite, and the Russell 1000 Growth Index. The first active ETF was launched by Bear Stearns in 2008. Despite making up just 7% of all global ETFs, active ETFs have attracted 30% of all fund inflows over the past several years, according to Matthew Bartolini, head of SPDR Americas Research at State Street (NYSE:).
The "ETF Rule" and Its Impact
A significant catalyst for this growth has been the 2019 regulation known as the “ETF rule,” which simplified the approval process for active ETFs by the U.S. Securities and Exchange Commission. Since then, assets in active ETFs have soared tenfold, as per data from ETF.com.
Unprecedented Growth in 2023
As of August 31, 2023, active ETF assets have increased by an astounding 42%, according to ETFGI data. The relaxed regulations have not only fueled growth but also spurred innovation, encouraging issuers to develop novel products to attract investor dollars.
Diverse Range of Active ETFs
From straightforward options like the BlackRock (NYSE:) Large Cap Value ETF to specialized funds such as the AdvisorShares Vice ETF, which invests in alcohol, tobacco, and cannabis companies, the range of active ETFs is vast. These regulatory changes have accelerated the introduction of unique products to the marketplace.
Volatility and Risk in Active ETFs
Active ETFs can be highly volatile. For instance, the Ark Innovation ETF soared 152% in 2020 but fell 23% the following year. So far in 2024, it has lost 9.74%, compared to a 20% gain in the S&P 500. Some active ETFs, like leveraged ETFs tied to individual stocks such as Nvidia (NASDAQ:), can also amplify risk.
Market Concentration and Challenges
Despite the growth, not all active ETF issuers are thriving. The top 10 issuers account for 75% of active ETF assets, while the bottom half of active equity ETFs hold just 3% of the group's assets, according to a Morningstar report. ETFs that simply repackage traditional stock-picking strategies have struggled to attract assets, said Jack Shannon, manager research analyst at Morningstar.
Investor Due Diligence and Future Growth
Tim Huver, senior vice president of ETF Servicing at Brown Brothers Harriman, noted that active ETFs might require more due diligence from investors. However, he believes the category is at a turning point. A Brown Brothers survey found that over 90% of ETF investors plan to increase their allocation to active ETFs. "I think the second trillion is going to arrive much more rapidly than it took us to get to the first trillion," Huver said.
Breaking It Down: How This Affects You
What Are Active ETFs?
Active ETFs are investment funds that aim to outperform specific market indexes. They are managed by experts who make strategic decisions about which stocks or assets to include in the fund.
Why Should You Care?
Active ETFs offer the potential for higher returns compared to passive ETFs that simply track an index. However, they come with higher risks and often require more research and due diligence.
Impact on Your Finances
Investing in active ETFs can be lucrative but also risky. It's essential to understand the specific strategies and sectors these ETFs are involved in. The growth in this sector indicates increasing trust and interest from investors, suggesting that more innovative and potentially profitable opportunities could arise.
Conclusion
With assets in active ETFs reaching $1 trillion and set to grow even faster, this is a pivotal moment for investors. Understanding the risks and rewards can help you make informed decisions that could significantly impact your financial future.