Active ETFs trump passive fees in new streams

Actively managed funds have taken more than 70% of management fee income from net flows to US-listed exchange-traded funds so far this year.

The figure, calculated for the first time as a result of this FT investigation, is a shot in the arm for an active funds industry that has been on the back foot as cheaper, passive index-tracking funds have seized an increasingly higher of investors. money

Assets held in passive U.S. ETFs and mutual funds surpassed those of active funds for the first time late last year, according to Morningstar, after active funds suffered $450 billion in outflows in 2023, even as passive ones collected $529 billion.

But after initially ceding the fast-growing ETF market to passive funds, active managers are fighting back. After adopting ETFs en masse, active ETFs accounted for 28% of net flows into US-listed ETFs this year, well above 8% of assets.

And thanks to much higher fees, that translated into active ETFs taking 72% of management fee income from the $588 billion of fresh money that flowed into U.S. ETFs in the first eight months of the year. according to Morningstar calculations.

“Investors are increasingly adopting actively managed ETFs, and while active ETFs are typically available at a lower fee than their mutual fund counterparts, they are offered at a higher cost than equity-based strategies broad indices,” said Todd Rosenbluth, head of research at TMX consultancy VettaFi. .

“More and more money is going into active ETFs and those fees are higher.”

Bryan Armour, director of passive strategies research for North America at Morningstar, said index-based investments “have been heavily marketed, which has forced asset managers to raise fee income elsewhere.”

“Actively managed alternative ETFs have been the main beneficiaries of this shift, particularly for crypto ETFs and options-based strategies such as hedged call and buffer ETFs,” he said. “You can accept small assets if you have a high-fee product.”

Active US-listed ETFs generated $265 million in fee income from net flows in the first eight months of 2024, according to Morningstar data, far more than the $105 million generated by passive ETFs.

This is a sharp change from 2022, when passive ETFs absorbed 69% of net new fee income, although the shift began last year, when actives took the lead with a 61% share.

The 2024 data was calculated by removing digital asset ETFs, mainly a series of bitcoin spot funds that launched in January.

If these cryptocurrency ETFs are included, then the swing to the asset is even stronger. On that basis, active ETFs generated $278 million in fee income from net flows this year, while passive ETFs actually saw a $26 million decrease in fee income. *See methodology

This discrepancy is largely driven by the passive ETF Grayscale Bitcoin Trust (GBTC), which had $20 billion in outflows that, with its whopping 1.5% fee, translated into revenue losses of 152 million dollars, far surpassing the earnings of everyone else. Passive ETFs, according to Morningstar.

“This is a massive loss of tax revenue for Grayscale. It actually pushed the entire negative passive category, which is wild,” said Armour.

Two other bitcoin funds, iShares Bitcoin Trust ETF (IBIT) and Fidelity Wise Origin Bitcoin ETF (FBTC), are among the top 10 revenue gainers this year. However, while they collected $30.9 billion between them, their much lower fees of 0.12% and 0.25% respectively translated into earnings of just $11.5 million and, respectively, 12.7 million dollars.

More successful in this regard was Volatility Shares’ 2x Bitcoin Strategy ETF (BITX), which Morningstar classifies as an active product. It may have only taken in $1.9 billion, but with a 1.9% tax, that equates to $14.3 million in earnings.

Other big active gainers by this measure were BlackRock US Equity Factor Rotation ETF ( DYNF ), $13.9 million, GraniteShares 2x Long NVDA Daily ETF ( NVDL ), $12.1 million, and JPMorgan Nasdaq Equity Premium Income ETF (JEPQ), $9.4. Mr.

“iShares actually reallocated their model portfolios to DYNF and pushed about $10 billion when they were in trouble before,” Armor said.

The biggest gainer was a passive fund, though of course a huge exception. The VanEck BDC Income ETF ( BIZD ), which invests in publicly traded business development companies, a type of closed-end fund, may have taken in just $332 million this year, but its gargantuan total expense ratio of 13 .3% led to an astounding increase in fee income of $19.1 million.

The top 10 losers include just one active fund — Cathie Wood’s flagship ETF, the Ark Innovation ETF (ARKK), which, with $2.4 billion in net redemptions and a hefty 0.75% fee, lost $7.4 million in revenue due to exits.

Aside from GBTC, the biggest loser was ProShares UltraPro QQQ (TQQQ), which tracks three times the daily performance of the Nasdaq 100 but delivered $4.3 billion and, with a fee of 0.88%, lost $18.1 million in revenue.

Other big losers include the SPDR S&P 500 ETF Trust ( SPY ), which had the largest net outflows of all ETFs at $18.6 billion; Grayscale again, with Ethereum Trust (ETH); and the iShares iBoxx $ High Yield Corporate Bond ETF (HYG).

Next are the SPDR Gold Shares (GLD) and the iShares Russell 2000 ETF (IWM). Armor described the duo as “higher-fee beta strategies that have seen possible exits due to cheaper versions of the same thing.”

Rosenbluth believed that active ETFs would continue to get most of the income from flows, given that their fees were typically about four times that of passive ETFs, meaning they had to ensure only one-fifth of the flows to reach parity.

“I think 20 percent of the flows to active ETFs are predictable in the short term,” he said. “The trend towards active ETFs will remain strong. Some investors prefer active management and are increasingly comfortable using ETFs.”

Armor sounded a note of caution though. “Wise investors recognize that fees are the best predictor of future success – be aware of who is profiting from high-fee ETFs,” he said.

Most active strategies “have had a tough time compared to just owning the S&P 500 or a similar index which is extremely cheap.”