ACTIVE ETFs: THE NEXT ACT - BNY Mellon
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ACCESS A BROADER MARKET PERSPECTIVE ACTIVE ETFs: THE NEXT ACT BY BEN SLAVIN
BY THE NUMBERS $9.35 TRILLION Worldwide assets invested in global exchange-traded funds and products1 $400 BILLION Worldwide assets invested in actively managed ETFs and ETPs2 152.5 PERCENT Growth of worldwide assets in actively managed ETFs and ETPs since the end of 20193 4.16 PERCENT Active ETFs as a share of global ETF assets4 188 Number of new ETFs launched in the U.S. in 20215 66 PERCENT Active ETFs as a share of 2021 U.S. ETF launches6 $25.3 BILLION Assets invested in the ARK Innovation ETF, the largest actively managed ETF7 $15 BILLION Inflows into the ARK Innovation ETF in the past year8 575.9 PERCENT Five-year return of the ARK Innovation ETF (ARKK)9 SOURCES: 1.ETFGI Active ETF and ETP Industry Insights, June 30 2021 2.ETFGI Active ETF and ETP Industry Insights, June 30 2021 3.ETFGI Active and ETF and ETP Industry Insights, June 30, 2021 4.ETFGI Active ETF and ETP Industry Insights, May 2021 5.Bloomberg Intelligence, as of June 29, 2021 6.Bloomberg Intelligence, as of June 29, 2021 7.ETF Database, as of July 1, 2021 8.ETF Database, as of July 1, 2021 9.ETF Database, as of June 30, 2021
A BOOM IN ACTIVELY MANAGED ETFS COULD BE
JUST THE START OF A SHIFT IN A $9.4 TRILLION
INDUSTRY THAT HAS LONG BEEN A BASTION OF
INDEX-TRACKING INVESTMENTS.
BY BEN SLAVIN
nvestors could be forgiven for jitters, inflation fears, and interest rate increasingly popular way for savers
I failing to notice the 2008 debut
of the first actively managed
exchange-traded fund (ETF).
Bear Stearns launched the first ETF
that invested based on the discretion
anxiety. Inflows into actively man-
aged U.S. ETFs in the first six months
of this year topped $55 billion, swiftly
approaching the 2020 full year intake
of $59 billion, according to Morningstar
to stay in the stock market, according
to reports. And companies sitting on
piles of cash are snapping up ultra-
short debt ETFs, trying to offset the
zero-interest drag of money markets
of human money managers instead of (see Figure 1). while minimizing the interest rate risk
tracking an index just one day after J.P. Currently, the largest of these funds inherent in longer-term bonds.
Morgan Chase & Co. upped its firesale is the ARK Innovation ETF (ARKK), the “Investors out there finally get it,”
bid to buy the beleaguered investment flagship fund from ARK Investment said Ben Johnson, director of global
firm. It was an inauspicious beginning: Management, a boutique asset manager exchange-traded fund research for
the Bear Stearns Current Yield Fund run by Cathie Wood. The fund raked in Morningstar. “‘Active ETF’ is not an
survived for less than a year. more than $15 billion in new investor oxymoron. There are a number of
Since then, market mavens have cash in the past year to become the funds that have enough of a track
repeatedly proclaimed the imminence largest actively managed ETF in the record to show they can deliver.”
of the long-awaited boom for active U.S., according to ETF Database. ARK’s
ETFs. This year may finally prove them other active ETFs are also growing, PASSIVE LEGACY
right. buoyed by a $17.8 billion haul for the Since the first ETF launched nearly
After more than a decade of fits and full year ended June 30. three decades ago, the industry has
starts, active management is gaining While some investors have been grown in lockstep with the sort of index
traction in ETFs, an industry long swept up by the eye-popping gains tracking strategies championed by the
viewed as nearly synonymous with of a few thematic funds, others are late Vanguard founder John C. Bogle.
plain vanilla index investing. Investors seeking safet y in active manage- Bogle sometimes criticized the high
are flooding in at a record pace, enticed ment. Discretionary strategies that fees charged by many mutual funds,
by triple-digit returns of some funds use options to limit exposure to stock whose stock pickers rarely outsmarted
and a potent cocktail of pandemic market downturns have become an the market, according to MarketWatch.“Investors out there finally get it. ‘Active ETF’ is not an oxymoron. There are a number of funds that have enough of a track record to show they can deliver.” —BEN JOHNSON, MORNINGSTAR Bogle suggested that investors could, three new transparent actively man- BEHIND THE BOOM at times, be better off investing in inex- aged ETFs, including offerings that pro- The recent surge is owed to a conflu- pensive funds that mimic diversified vide unique exposure to remote work ence of circumstances, including two benchmarks. technology innovations. major regulatory changes that made His idea caught on, accelerating Last year, the industry also saw the ETFs far more appealing to would-be in the wake of the financial crisis. In long-awaited debut of the first active issuers. In September 2019, the U.S. August 2019, assets in passive U.S. non-transparent ETFs; there are now Securities and Exchange Commission equity mutual funds and ETFs over- three dozen active non-transparent approved the so-called “ETF Rule,” took active for the first time, according ETFs on the market. This year, firms which standardized the regulations for to Morningstar. such as Putnam Investments, T. Rowe launching and operating ETFs. That While that trend shows little sign of Price and Fidelity Investments intro- same year, the SEC approved the first an outright reversal, active managers duced ETF copycats of popular active active non-transparent ETFs, removing are clawing back some ground. To be mutual funds, including an ETF ver- a major hurdle that had kept many sure, active ETFs remain a small piece sion of the $27 billion Fidelity Magellan active managers on the sidelines. of the $9.4 trillion global ETF industry, fund. Vanguard, meanwhile, launched “The ETF Rule leveled the playing accounting for roughly 4.2% of assets, its first actively managed bond ETF. field,” said Stephanie Pierce, chief according to ETFGI, an independent In March, Guinness Atkinson Asset executive officer of ETF, index and cash research and consulting firm. But that Management completed the first ever investment strategies for BNY Mellon may be changing. Worldwide assets conversion of mutual funds into ETFs. Investment Management. in active ETFs have more than dou- Dimensional Fund Advisors followed BNY Mellon has filed a registration bled since the end of 2019, ETFGI data suit in June, converting four actively statement with the SEC to add the first show. managed mutual funds into ETFs, active fund to its ETF lineup, an ultra- “This year is really the year that bringing over roughly $30 billion in short fixed income fund. Ultra-short we’re seeing net flows into active pick assets. It was the largest conversion to and short-term debt funds have been up,” said Deborah Fuhr, founder and date, and instantly made DFA one of one of the most popular segments of managing partner of ETFGI. the 15 largest ETF issuers. So far this the active ETF market, according to a A s s e t m a n a ge r s h ave a c c e l e r- year, actively managed ETFs account NASDAQ report, as the prolonged era of ated their active activity, staking out for nearly 66% of new ETF launches near-zero interest rates has asset man- new territory in ETFs. In October, in the U.S., a record, according to data agers and corporate treasurers hunting BlackRock’s iShares unit launched from Bloomberg (see Figure 2). for safe ways to boost yields.
ACTIVE INGREDIENTS
Net flows into actively managed U.S. ETFs have surged.
20 Billion
15 Billion
MONTHLY INFLOWS (U.S. DOLLARS)
10 Billion
5 Billion
08
09
10
11
12
13
14
15
16
17
18
19
20
21
20
20
20
20
20
20
20
20
20
20
20
20
20
20
h
h
h
h
h
h
h
h
h
h
h
h
h
h
rc
rc
rc
rc
rc
rc
rc
rc
rc
rc
rc
rc
rc
rc
Ma
Ma
Ma
Ma
Ma
Ma
Ma
Ma
Ma
Ma
Ma
Ma
Ma
Ma
5 Billion
SOURCE:MORNINGSTAR INC., DATA AS OF MAY 31, 2021
FIGURE 1
SPECIAL INTEREST
Launches of new active exchange-traded funds are on track for a record-breaking year.
350
300
TOTAL ETF LAUNCHES
250
ACTIVE ETF LAUNCHES
200
150
100
*Cathie Wood debuts ARK’s first active ETF
50
0
2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 YTD 2021
FIGURE 2 SOURCE: BLOOMBERG LPFUTURE FOR ACTIVE
An increasing proportion of investors say they plan to raise their exposure to
actively managed ETFs.
7% 28% 59% 5%
21
20
6% 19% 75%
20
20
75% 100%
0% 25% 50%
INCREASE BY MORE THAN 20% INCREASE BY 5% TO 20% NO CHANGE DECREASE BY 5% TO 20% DECREASE BY MORE THAN 20%
SOURCE: JPMORGAN, TRACKINSIGHT GLOBAL ETF SURVEY 2021
FIGURE 3
This year, BNY Mellon also plans has already risen from 4% to 14% (see ETF space.” The following year, State
to make ETFs from several fund Figure 4). Street partnered with private equity
companies available through its “I was surprised — I still am — how firm Blackstone Group to launch the
short- end investments platform, long it has taken for active [ETFs] SPDR Blackstone Senior Loan ETF, an
LiquidityDirectsm. to catch on,” said John Southard, actively managed senior loan strategy.
“Our clients are taking a more co-founder of PowerShares Capital In 2015, State Street launched the SPDR
sophisticated view in terms of how Management, and now co-founder and DoubleLine Total Return Tactical ETF.
they manage cash,” said Pierce. “I think chief investment officer of Innovator, The fund, managed by Gundlach’s
we’re going to see more clients who another ETF shop. DoubleLine Capital, was one of the
used prime money markets in the past It wasn’t until PIMCO, a leading fastest growing ETFs of the year.
start to use ultra-short-term alongside, name in fixed-income investment man- MINT proved to be a long-lasting suc-
or in place of, prime funds.” agement, launched an ETF version of cess, reigning as the largest active ETF
its popular short-term debt strategy on the market for more than a decade.
SLOW START in 2009 that active ETFs gained real Today, that honor goes to ARKK.
The very first ETF — the SPDR S&P 500 traction. The PIMCO Enhanced Short
ETF Trust — debuted in 1993, but it took Maturity Active Exchange-Traded TAKING OFF
another 15 years before the first actively Fund, which trades under the ticker “The biggest reason active manage-
managed ETF reached the market. MINT, c apit alized on post- c ri si s ment is taking off is Cathie Wood,” said
After the 2008 Bear Stearns debut, demand for higher yields. Eric Balchunas, senior ETF analyst at
other firms quickly followed suit. “When PIMCO launched MINT, that Bloomberg Intelligence. “She really
PowerShares, now part of Invesco, was a game changer for active ETFs,” showed how investor demand can be
launched an active fixed income ETF said Todd Rosenbluth, senior director there.”
as well as the first active equity ETFs. of ETF and mutual fund research at Wood, ARK’s founder and chief
Some 54% of respondents to a survey CFRA, a research firm. investment officer, began her career as
from J.P. Morgan and TrackInsight said Like MINT, the most successful active an assistant economist for The Capital
they are invested in active ETFs today, ETFs piggybacked off the reputation of Group before taking a job with Jennison
up from 31% a year earlier, with 35% marquee managers like Bill Gross or Jeff Associates. She spent 18 years with the
saying they would increase their expo- Gundlach. When PIMCO introduced an firm in various roles, including chief
sure over the next few years (see Figure ETF version of its Total Return Bond economist, equity research analyst,
3). The share of investors with an expo- Fund in 2012, it was touted by CNN as portfolio manager and director. She
sure of more than 20% to active ETFs “a litmus test for the actively managed went on to co-found a hedge fund,HAVE AND HOLD
Investors have increased their exposure to actively managed ETFs.
88%
2020 2021
Percentage of portfolio invested in actively-managed ETFs
70%
53%
35%
18%
0%
None 1%-5% 6%-10% 11%-20% 21%-30% More than
40%
FIGURE 4 SOURCE: JPMORGAN, TRACKINSIGHT GLOBAL ETF SURVEY 2021
Tupelo Capital, in 1997 before moving published white papers, hosted pod- market segments such as work-from-
to AllianceBernstein, where she spent casts, and became a regular guest on home technology, e-commerce, and
12 years as chief investment officer of financial news shows. She sent out reg- genomics — all areas that ARK has spe-
global thematic strategies, managing ular emails about her trades and publi- cialized in for years, Leggi said. “As a
more than $5 billion. Her experience cized her stock picks on Twitter. result of the pandemic, we’ve seen
taught her to pay attention to ideas that ARK’s first three years were a an acceleration of the adoption of the
other investors ignored. struggle. In 2015, ARK’s ETFs took in technologies that we’re investing in,”
After AllianceBernstein, Wood went a paltry $17 million combined. Her Leggi added.
out on her own. She founded ARK fortunes began to turn in 2017 when W h i l e t h e f i r m’s f l a g sh i p E T F
Investment Management in January two of her ETFs were among the top returned triple digits in 2020, investors
2014. Nine months later, she launched performers for the year. Since then, shouldn’t expect those kinds of gains
ARK’s first actively managed ETFs. the firm’s flagship fund has continued every year, he said. The firm aims for a
At the time, many stock pickers to beat the market. Through June 30, 15 percent annualized return, but per-
were put off by the transparency of ARKK returned nearly 576 percent formance can be volatile year to year,
ETFs. Unlike mutual funds, the vast in the past five years, 191.6 percent Leggi said.
majority of ETFs must disclose their in the past three, and 73.7 percent Two actively managed thematic
holdings every day — an anathema for in the past year, according to ETF funds from Amplify ETFs delivered tri-
stock pickers who jealously guard their Database. ple-digit returns in the past year. Both
trading secrets. By opening their books, ARK’s suite of active ETFs has grown funds handily outperformed their
money managers ran the risk that copy- increasingly popular because the index-tracking rivals because their port-
cats could muscle in on their best ideas. appetite for investing in technological folio managers can buy and sell stocks
Instead of shying away from trans- innovation has expanded, said Renato more nimbly than benchmark-bound
parency, Wood embraced it. She made Leggi, client portfolio manager for ARK. competitors, said Christian Magoon,
ARK’s investment research public. She The pandemic also boosted interest in founder and CEO of Amplify ETFs. ByACTIVE BY ASSET CLASS
Fixed income counts for the largest slice of assets in exchange traded funds and products worldwide.
3%
4% COMMO-
DITIES
MIXED
FIXED INCOME
EQUITY
MIXED
COMMODITIES
ALTERNATIVE
35% CURRENCY
EQUITY 58%
FIXED INCOME
SOURCE: ETFGI; DATA AS OF MAY 2021
FIGURE 5
eschewing an index, Amplify’s active “People still have wealth protec- FIXED INCOME
ETFs can also invest in IPOs and some tion on their minds,” said Southard, While thematic and defensive strategies
of the smallest companies that would Innovator’s CIO. “It’s hard to invest are gaining ground, fixed income is by
be hard to make room for in a passive without thinking about protection far the largest segment of the active ETF
strategy, he added. when stocks are at all-time highs.” marketplace. Fixed income ETFs have
“These are strategies that require Another active options strategy that's grown rapidly in recent years as institu-
you to be opportunistic and dynamic, garnering interest is the Quadratic tional investors, traders, insurers, and
and that’s hard to write into index Interest Rate Volatility and Inflation corporate treasurers have added ETFs
rules,” Magoon said. Hedge ETF, run by Nanc y Davis, to their fixed income holdings.
founder and CIO of Quadratic Capital Active management has had a firm
ACTIVE DEFENSE Management LLC. The fund seeks to foothold in the ETF marketplace since
Not every investor has been drawn to protect purchasing power and uses an the advent of MINT. And for good
active ETFs because of a few hot the- actively managed portfolio of options reason: Fixed income has proven to be
matic funds. Actively managed defen- and inflation-protected Treasuries to an asset class where active managers
sive strategies have also been a popular profit from the steepening yield curve. have a decent track record of beating
way to counter market uncertainty. In the two years since its debut, the their indexed rivals, said Morningstar’s
Innovator’s three-year-old suite fund has grown to $3.4 billion in assets. Johnson. Roughly 58% of the assets
of defined outcome ETFs, which use Exchange-traded commodity prod- invested in active ETFs worldwide is in
options to protect investors against ucts have also gained ground as inves- fixed-income funds, according to ETFGI
market downturns, don’t have the tors try to hedge their portfolio against (see Figure 5).
same kind of discretionary strategy, but inflation in raw materials prices. For One particularly popular segment
they are nonetheless part of the active example, an actively managed com- has been short-term and ultra-short-
ETF marketplace. The funds took in modit y ETF from Invesco gained term debt funds. The JPMorgan Ultra
$1.4 billion in 2020, and another $771 $2.3 billion in inflows in the first half Short Income ETF has taken in $4.6
million in the first half of this year. of 2021. billion in the past year, growing to“Active managers have long felt that daily
transparency could eat into performance.
With the new non-transparent offerings
those concerns can be largely put to rest.”
— JC MAS, BNY MELLON
more than $17 billion. It’s now the their active roster. With the new non-transparent offer-
second largest active ETF after the ARK “Given the assets in active mutual ings, those concerns can be largely
Innovation ETF, just ahead of MINT. funds, we’re still in the first inning put to rest.”
The BNY Mellon Ultra Short Income for active ETFs,” said Brandon Clark, The key to success in active manage-
ETF, expected to launch in August this direc tor of the ETF business for ment is understanding what investors
year and trade under the ticker BKUI, Federated Hermes Inc., an active are looking for, said Balchunas, the
will be sub-advised by Dreyfus Cash investing firm with $625 billion under Bloomberg analyst. So-called closet
Investment Strategies, BNY Mellon's management. Federated, which has yet indexers, who are technically active
affiliated money market business and to launch an ETF, plans to introduce its but stick fairly close to the index, will
the eighth largest money market fund own suite of active ETFs later this year, have a hard time standing out, espe-
sponsor in the U.S. Clark said. cially if they’re charging higher fees,
“The yield environment is absolutely Today, there are roughly three dozen he said, but when it comes to niche
the driver,” Pierce said. “What we’re non-transparent ETFs on the market, active strategies like those offered by
seeing is that clients are struggling for though uptake has been slow, said ARK and Amplify, investors are much
yield, but they don’t want the volatility Johnson. So far, only five have amassed less price- sensitive.
of the longer-term bond funds.” more than $100 million in assets, a “Benchmark huggers who play it
crucial threshold that demonstrates safe aren’t going to win investors,”
THE FUTURE OF ACTIVE the viability of an ETF and helps funds Balchunas said. “Investors want either
The big question is whether the recent gain access to distribution platforms, dirt cheap or shiny objects. They’ve
boom in active ETFs is a performance he added. got the boring base of vanilla, and they
chasing blip, or a lasting commitment But the active non-transparent space want a pop of active on top.”
to active on the part of both ETF inves- should continue to grow as money
tors and issuers. Money managers managers find new ways to wrap their
are clearly hoping there’s still room trading strategies into an ETF, said JC Ben Slavin is head of ETF Services for BNY
for growth. In addition to the ultra- Mas, head of equity and ETF trading for Mellon.
short term debt ETF, BNY Mellon has BNY Mellon. Questions or comments? Contact jeremy.
several other actively managed ETFs “The ETF structure is a more effi- kross@bnymellon.com, ron.hooey@
in registration, SEC records show. cient vehicle,” Mas said. “Active man- bnymellon.com, or matthew.camuso@
Other firms are also gearing up to agers have long felt that daily trans- bnymellon.com, or reach out to your usual
enter the active market, or to expand parency could eat into performance. relationship manager.BNYMELLON.COM
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