The Number of Active ETFs Is Soaring. How Many Is Too Many?

So many active ETFs. So little time.

Active ETFs have exploded in popularity over the past few years. Independent RIAs held roughly $28 billion in active ETF assets in the first quarter of 2021, which surged to nearly $400 billion by the end of last year, according to FintrX data. Yet despite the rapid growth, advisors remain cautious about significantly increasing allocations. Active ETFs now account for roughly 80% of new launches, and industry experts say the sheer number of products entering the market can make it harder for advisors to determine where active ETFs belong in client portfolios. 

“There’s so much product out there,” Brett Sheely, head of ETF specialists at AllianceBernstein, said during a panel discussion at the ETP Forum in New York on Tuesday. While active ETFs can play an important role in portfolios, he said, advisors can easily become overwhelmed by the expanding menu of options. “I do think that the onus is really on us [as asset managers] to ensure we’re providing all the education along with the tools.”

Winners, Losers

Active ETFs don’t track a benchmark, and in many cases, attempt to outperform the broad market. That promise can appeal to investors, but it can also create challenges for advisors tasked with explaining performance when results fall short. “When you get that phone call saying, ‘Why did you put me in this?’ you’ve got to answer those tough questions,” said Marc Zuccaro, portfolio manager at Golden Eagle Strategies. 

He argued that the active ETF market will eventually separate winners from losers, pointing to SPIVA data showing that roughly nine out of 10 active funds underperform their benchmarks over long periods. “This is a big industry, a lot of smart people, a lot of people who went to good schools, and for the industry to overall perform like that is not great,” he said.

Not everyone on the panel viewed active ETFs through the same lens. Conor Foley, head of business development at Marex, argued that investors should have the freedom to take calculated risks. “I don’t know that we should necessarily always be trying to protect retail investors from themselves,” he said, adding that active ETFs can offer a more accessible way to pursue higher-risk strategies than trading options or futures directly.

Money Where Your Fund Is. For his part, Sheely puts his own money into active ETFs. “That’s where I usually look for things that are differentiated and where I think I can get longer-term outperformance,” he told Advisor Upside in an interview. “I can’t get that through an index.”