While the fastest-selling ETF this year has had monster returns, investors aren’t necessarily cashing in.

That’s because so much of the flows into the Roundhill Memory ETF (DRAM) happened following the fund’s performance tear from early April to mid June, after which its price fell by about 37%, data from Morningstar show. In fact, the fund returned 80% this year, but the money invested in it has on average lost 20%. It might be a scenario of eager investors chasing returns, one of true believers buying at what they see as a discount, or more likely a combination of those. In any case, money hasn’t flowed out of DRAM, which since it launched this year has pulled in money faster than almost any ETF in… well… memory.

“It has just been a machine, hoovering up cash from investors,” Morningstar managing director Jeff Ptak said. The fund’s overall performance “has not accrued to their benefit, because so much of that money has come in such a short amount of time.”

Long-Term Memory

The difference between the fund’s overall returns since its launch and how the average dollar invested has performed is based on the timing of flows into and out of the ETF. It’s essentially a calculation for internal rate of return, Ptak said. And, though the difference between fund and dollar-weighted returns is particularly big in this case, it’s common for there to be a gap, as Morningstar’s recent report on the topic found. The figures Ptak calculated for DRAM are based on flows, assets and performance from April 1 through Aug. 3. If investors stay put and DRAM rallies the gap will narrow, he noted.

Still, the fact that so much money went into the fund when it did is a testament to the opportunities investors see in AI, Roundhill CEO Dave Mazza told ETF Upside. “The flows tell the best story: From DRAM’s peak on June 22 through its low on July 29, the fund took in $10.4 billion of net inflows even as the price fell, which is the opposite of what performance chasing looks like,” he said. “Investors are treating memory as a long-term secular growth story tied to the AI buildout, and less of a momentum trade. Typically, momentum money exits when price falls.”

While memory is one category that the firm sees as a bottleneck in AI, there are others, and it last week launched two ETFs in that vein:

• The Roundhill Photonics & Optics ETF (LYTE) focuses on companies replacing copper transceivers with optical ones.
• Its Neocloud ETF (NCLD) invests in companies renting out capacity from graphics-processing units (GPUs), something necessary for AI models to train and run.

The Rent is Too DRAM High: “Hyperscalers are building out datacenters, but are going to neocloud and asking for compute,” Roundhill ETF strategist Thomas DiFazio said, describing the neocloud as toll-road providers. Bitcoin miners have moved in on that as well, renting out their GPUs, he noted. And in the LYTE ETF, the company sees potential for photonics, as “light can operate over much longer distances and at much greater speeds, with less heat” than copper, he said. “There is continuous innovation that’s going on within photonics and optics.”

It’s not quite apple-picking season yet, but active managers have had a fruitful year so far.

Actively managed funds are gaining ground on their passive peers, with about 40% of actively managed mutual and exchange traded funds beating the average return of comparable, asset-weighted passive funds over the past 12 months. This is up 7 percentage points from the same time last year, according to a Morningstar report. Meanwhile, active ETFs’ market share has tripled in the past five years, going from 4% of total US ETF assets in 2021 to 12% of the $14.9 trillion market last year, according to a UMB Financial report. But the success of active strategies sometimes simply depends on the type of the fund, said Brendan McCann, a research analyst for Morningstar.

“Indexing does really well in a large liquid space, like large-cap stocks, where you have a ton of participants working together, lots of transactions, and so there’s greater price discovery,” said McCann. But smaller or niche markets “tend to be less efficient than large-cap markets, so there’s less price discovery going on, and there’s more opportunity for active managers to actually go in and find mispricing.”

No Cap

Active large-cap funds’ success rate lagged behind other categories, with only 27% outperforming their average passive counterpart. This is likely due to the market’s current concentration in large-cap companies, since active managers typically hold less of the larger stocks than the market does, according to McCann. “While the market on paper may be overconcentrated, that doesn’t stop those larger stocks from continuing to grow,” said McCann. “If you’re underweight the largest portion of the market that does super well, you’re going to underperform.”

Other categories had greater success over the past year:

• Both small and mid-cap active funds performed nearly 20 percentage points better than the prior year, outpacing passive rivals by 49% and 47%, respectively.
• Active bond funds had a success rate of 52%, as they generally took more credit risk than their indexed counterparts.
• Active global real estate funds had the highest success rate of any category at 74%, up from 14% in the prior year.

It Pays to Be Cheap: A third of active funds in the cheapest quintile of their respective categories beat their average passive counterparts, as opposed to only 20% for the most expensive funds. If two funds perform the same before the fee, the fund with the lower fee will obviously win, McCann said. “There’s a lot of funds that outperform the market, but then when you charge fees, they’ll underperform,” he said. “It’s like starting a race with whatever the opposite of a head start is.”

Ethereum and solana exchange-traded funds just got a little cheaper.

Morgan Stanley joined the fray of issuers offering crypto products that track the performance of solana and ethereum late last month after launching a similar bitcoin product in April. The move marks the latest effort by the wirehouse to build up its crypto offerings for coin-crazed clients and could place downward fee pressure on other issuers. The Morgan Stanley products have an expense ratio of just 0.14%, which, among solana products, is several basis points lower than existing offerings from Grayscale and Bitwise, whose Solana staking ETFs have fees of 0.19% and 0.20%, respectively.

“[Morgan Stanley’s new ETFs] do have the lowest fees of the group … It’s very close, but they are still the lowest-fee product,” said Roxanna Islam, head of sector and industry research at TMX VettaFi. “It’s something that’s very appetizing, especially to retail investors who are mindful of fees.”

Last One’s a Rotten Coin

With new crypto offerings, Morgan Stanley, which has often been the first among its wirehouse peers to venture into crypto, is tapping into a huge wealth network to give retail investors access to popular coins. The bank announced last month that some clients can now buy, sell and hold bitcoin, sol and ether via E*Trade, its self-directed brokerage platform. “They have a lot going on in-house where these products can be distributed,” Islam said. “So that’s another huge catalyst for Morgan Stanley to launch these [funds].” The wirehouse’s Bitcoin Trust has already surpassed $400 million in assets, placing it solidly in the largest 15 products despite its relatively recent inception, according to ETF.com data.

Still, the largest solana and ether products on the market belong to Bitwise and iShares, respectively:

• The largest Ethereum fund is the iShares Ethereum Trust (ETHA), which represents roughly $5.5 billion.
• The largest Solana staking ETF currently available in terms of AUM is the Bitwise Solana Staking ETF (BSOL), which oversees approximately $600 million.

New Coin on the Block: Solana ETFs are newer, and therefore smaller than their crypto cousins, Islam said. (The largest has yet to cross the $1 billion threshold.) But Morgan Stanley’s ether product is not the smallest on the market, which is surprising given how recently it launched, she added. And the firm’s bitcoin product has seen inflows this year so far despite major outflows in the currency as a whole.

Some lower-fee products, like the Grayscale Bitcoin Mini Trust (BTC) and the Morgan Stanley Bitcoin Trust (MSBT), have seen inflows, Islam said. “I wouldn’t say they’re going to take the throne away from BlackRock … but I would say that they’re pretty significant products, and they’re making their name in a tough time,” she told ETF Upside.