As worldwide industry assets rise to more than double 2018 total, asset managers look to carve niches in active ETF space
In October this year, the Canadian ETF industry reached a historic landmark as it crossed the $300-billion AUM mark. Just a month later, the global ETF space logged a record of its own.
Citing figures from Morningstar, the Wall Street Journal reported that global inflows into ETFs have topped US$1 trillion for the first time at the end of November, handily beating last year’s total of US$735.7 billion.
With that torrent of investment, as well as a general trend of rising markets, global ETF assets have advanced to reach nearly US$9.5 trillion, almost twice the year-end total for the industry at the end of 2018. The majority of that is in low-cost, index-tracking funds run by the triumvirate of Vanguard, BlackRock, and State Street, which together account for three quarters of all ETF assets in the U.S.
To compete against the titans of the industry, asset managers are exploring actively managed funds in hopes of discovering an unfilled niche. While active products have in the main struggled against the broader market, the success of ETFs managed by ARK Investment Management in 2020, which turned CEO Cathie Wood into a household name, has been a brilliant example to follow.
For their part, investors have put in a record amount of US$84 billion into ETFs that search for outperformance by selecting different combinations of securities, rather than tracking swaths of the stock market. Against that backdrop, some asset managers have converted mutual funds into active ETFs, while others have introduced ETFs that copy popular mutual funds.
Citing data from FactSet, the Journal said more than half of the record 380 U.S.-listed ETFs launched this year are actively managed. According to Elizabeth Kashner, FactSet’s director of ETF Research, the bull run in the stock market has proven to be the wind at the backs of many ETF providers, and 2021 has seen the smallest number of fund closures in eight years.
Still, a large number of active ETFs still haven’t reached the critical asset threshold that would ensure their survival past their first birthday. The fact that they charge higher fees than passive funds further raises their risks of closure in the coming years.
“You’re going to see a lot of those firms take a hard look at their future,” Kashner told the Journal. “Beating the benchmark quarter after quarter, year after year, is a very difficult task at which active managers have traditionally struggled. The ETF wrapper doesn’t change that calculus.”
