Wall Street is betting on an active management comeback with new ETF launches


The growth of active ETFs is not slowing, as asset management firms of all sizes are shaking an industry that has been built on passive investing for decades. CFRA reports that there were 68 active funds launched in the third quarter, as of September 22. This compares to 49 launches of indexed funds. This week, several more active funds will be launched. This puts this period over the second quarter levels and may even surpass the 78 listings in the third quarter last year. The majority of ETFs are passive funds, which cost less on average than active products. Most of the biggest passive funds follow indexes such as the S & P 500. This is an index that most active managers are unable to beat every year. In a year such as 2023, when a significant portion of returns was driven by a small number of stocks, it can be difficult to beat the market. Investors are looking for products that generate income without experiencing dramatic price fluctuations. The volatility of the stock market over the past few years has created this desire. BlackRock’s new BlackRock Large Cap Income Fund (BALI), which was launched on Thursday, is a fund that fits into this trend. In spite of the turbulent market, clients continue to demand ETFs which can provide consistent income while actively managing risk. Investors increasingly seek out differentiated income and growth sources for their portfolios. This could be to fund a long-term retirement or to achieve other financial goals. Rachel Aguirre is the U.S. head of iShares Product for BlackRock. What works? The BlackRock fund uses active management to select dividend stocks, along with an overlay of options designed to increase income. This strategy is similar in many ways to popular income products offered by JPMorgan – JEPI and JEPQ – which, according to FactSet have raked up about $16 billion in new assets in the past year. In part, this was due to yields at times comparable to junk bond funds. JEPI is the largest active ETF. It has underperformed this year’s S & P 500 but still attracts new money. “One of our problems, and this is true for some of the active funds we run, is that you’re often tied to an index. We do run a few active funds which are focused on different outcomes. For example, income, so that you don’t really try to beat the Nasdaq 500 or S & P 500,” explained Euan Munro. He is the CEO of Newton Investment Management a division within BNY Mellon Investment Management. Fixed income and international equity are also areas where active ETFs have gained traction. This suggests that investors are willing to pay more for an active manager on markets with greater transparency. Cooper Abbott, CEO of Matthews Asia, said that the ability to have an X-ray view on emerging markets is crucial. Abbott’s company launched five active funds, including the Matthews Japan Active Fund (JPAN), last week. A new era? Regulation changes are partly responsible for the growth of active funds. In 2019, the SEC relaxed restrictions on ETF launches, so investors are shifting from active mutual fund strategies to active ETFs that have similar strategies. You’re seeing more managers, like ourselves, curating their capabilities and saying what else clients would want to access through this vehicle. You’re seeing a lot of fund launches, but also a lot of clients that already know and trust the manager. They already know their capabilities, so they want to use this vehicle,” said Stephanie Pierce. She is the CEO of Dreyfus Mellon & Exchange Traded Funds, BNY Mellon Investment Management. Asset managers could limit financial damage if active ETFs are successful. This is because they can use them to counteract the trend where investors move from expensive mutual funds to lower-cost passive funds. The active fund market could attract some of the most prominent managers. For example, Jeremy Grantham’s GMO filed a request for its first ETF in December. “I believe active ETFs represent the next step in recognizing the potential of this vehicle. In the past, ETF 1.0 was all passive. Then there was 2.0, with its factor-based products. “…and 3.0 brings true active management,” Abbott stated.