Active ETFs Take More Market Share From Mutual Funds

Active ETFs are taking more market share from their mutual fund cousins, adding 20% in assets annually over the past five years as investors increasingly show their preference for the lower cost, more flexible exchange-traded funds.

At the same time, they are becoming a larger slice of the overall ETF market, having quadrupled to 8.5% of the market from 2% in 2019, according to Morningstar's recent report on actively managed funds. While their assets are just over $600 million out of the approximately $8.9 trillion in U.S. ETFs, they are growing faster than the overall market and their passive counterparts. 

Investors have put $375 billion into actively managed ETFs in the past five years, according to Morningstar. Over the same time period, $1.8 trillion has been pulled from active mutual funds.

Actives are surging thanks to a combination of lower costs, regulatory changes, new products and market activities, Bryan Armour, director of passive strategies research for Morningstar, said in the report. Helping the funds is the fact that according to Morningstar, the average active ETF is 36% cheaper than the average mutual fund. Armour said the funds after remaining relatively obscure for years will continue growing on investor demand and helping fund manages struggling with outflows from active mutual funds.

"This trend is just getting started," Armour said in the report. “Active ETFs have taken center stage in the fund industry."

ETFs Take Market Share From Mutual Funds

The largest of the 1,408 active U.S. ETFs is the $33 billion JP Morgan Premium Income ETF (JEPI), which has pulled in $8.7 billion from investors. Dimensional Fund Advisors is the largest active ETF provider, with $135 billion in assets under management.

Financial advisors prioritizing ETFs over mutual funds, portfolio managers adopting greater transparency, and more mutual funds converting into ETFs are all responsible for the growth of active ETFs in recent years, according to Armour.

Another key driver of active ETF growth was the SEC’s passage of the ETF Rule in 2019, which removed some regulatory barriers to creating a fund, according to Armour. 

Contact Lucy Brewster at [email protected].