When comparing active management in ETFs and mutual funds, several key differences emerge:

  • Transparency and Trading Flexibility: Active ETFs offer daily transparency and intraday trading, enabling better portfolio management and tax strategies compared to mutual funds.
  • Tax Efficiency: Active ETFs are more tax-efficient due to their "in-kind" share creation and redemption process. Only 4% of ETFs distributed capital gains last year compared to 60% of mutual funds (Morningstar, June 28, 2024).
  • Cost Structure: Active ETFs often have lower expense ratios than active mutual funds due to differences in shareholder servicing and trailer fees.
  • Performance: Over the past five years, 47% of active ETFs outperformed their benchmarks, while 45% of active mutual funds did so. In the bond sector, 71% of active bond ETFs beat their benchmarks, compared to 54% of active bond mutual funds.

Trends and Future Catalysts in Active Management

  • Growth in Active ETFs: The 5-year CAGR for active ETFs was 54%, 2.5 times the rate for passive ETFs and 13 times higher than active mutual funds. In 2023, more than 75% of US-listed ETF launches were active. As of H1 2024, active ETF AUM globally was USD 900 billion, projected to reach USD 4 trillion by 2030 (Blackrock).
  • Advisor Adoption: Over 60% of advisors plan to increase ETF usage, with nearly 50% focusing on active ETFs.
  • Regulatory Changes: The 2019 SEC rule allowing semi-transparent ETFs has expanded options for active ETF managers and investors, driving growth.
  • ESG and Theme-Based Investments: Active ETFs are well-positioned to meet increasing demand for ESG and thematic strategies.
  • Fee Compression: Ongoing competition in asset management is likely to make active ETFs more attractive due to their lower costs compared to active mutual funds.

Outlook

The outlook for active management in ETFs is positive, driven by their unique benefits, lower costs, tax efficiency, and trading flexibility. As investors seek strategies that outperform benchmarks and align with ESG and thematic considerations, demand for active ETFs is expected to grow significantly, with AUM projected to reach USD 4 trillion by 2030. Regulatory support, advisor adoption, and evolving investor needs position active ETFs to become a more prominent component of investment portfolios in the future.

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