Active ETFs Surge Among Advisors

Mutual funds may be the king of asset classes, but ETFs, especially the active variety, are gaining plenty of favor with advisors. 

Nearly 30% of wealth managers had exposure to active ETFs, according to a Fidelity report that reviewed more than 3,000 professionally managed portfolios in the second quarter. That’s up from just 13% in 2022. Active funds are gaining traction because they have all the benefits of regular ETFs — tax efficiencies, lower costs than mutual funds, liquidity, and transparency — but can actively try to outperform the market. They’re also benefiting from advances in trading platforms, model portfolios, and lower transaction costs, according to the report.

“The rise in ETF allocation has been quite staggering,” Fidelity SVP and head of investment specialists Michael Scarsciotti told The Daily Upside. He added that advisors allocated 42% of their portfolios to ETFs in total in the second quarter, about half of which were active products. 

New Kid on the Block

Not only are more advisors adding ETFs and their active variants to portfolios, but the allocation is increasing as well. Overall ETF allocation stood at 27% in 2023, 21% in 2022, and 18% in 2021, Scarsciotti said. As for active ETFs, the average allocation was around 17%, according to the report. 

While active ETFs debuted during the Great Recession, they hit prime time after a Securities and Exchange Commission ruling in 2019 made it easier to launch them. Additionally, Scarsciotti said advisors are adding extra shareholder value through active management:

• Active ETFs gathered roughly 30% of the US asset management industry’s inflows this year as of August, according to a VettaFi report. However, they still represent less than 10% of US assets.
• Globally, there are about 13,200 active ETFs on the market, and they’ve accounted for 70% of product development since 2019. Active ETFs are soon expected to represent $1 trillion in assets under management.