The increasing popularity of active ETFs has been one of the defining ETF narratives so far this year. Investors are planning to add active ETF allocations looking ahead, while active strategies have also put up strong returns in their respective areas. With the year more than halfway done, investors and advisors have even more data to consider in active investing. Recent research from Morningstar shows that active ETFs posted a 14% organic growth rate in the first half of the year compared to passives’ 3%.
Why might actives have done so well this year? Active ETFs have significant advantages in navigating market uncertainty like rising rates and inflation, it should be noted. However, in this case, rising investor interest may owe to a shifting perception of active investing as much as actives’ inherent advantages over passive strategies.
That changing perception shows up in investor surveys. A majority of respondents to at least one survey shared that they plan to increase their active allocations in the next two to three years. That underlines a prolonged, multi-year shift towards actives.
What’s Driving Active ETFs’ Organic Growth?
One reason for active ETFs to have so significantly outgrown their passive peers may owe to the current market environment. With the S&P 500 so overconcentrated, passive strategies may lack the ability to respond or cover that risk as well as actives. Similarly, investors may be concerned by index-oriented equities becoming too expensive, with active strategies applying manager-driven screens to avoid firms with questionable balance sheets, for example.
At the same time, while some active strategies come with a reputation for charging significant fees, not all active ETFs charge fees that high. Indeed, some active ETFs offer their exposures for fees lower than those found in certain passives focused on a specialist theme or core-plus approach.
Whichever the case, active funds have had a strong first half of 2023 relative to their passive peers. For those investors looking at whether active strategies can play a role in their portfolios, keep an eye on the second half of the year to see if they can repeat that feat.
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