Active ETFs launches have surged this year, but are all these new debutants all dressed up with nowhere to go?

Active ETFs inflows are on fire, with those of the first six months of this year nearly matching all of 2024, according to a Cerulli report issued last week. Still, 71% of ETF issuers told the research and consulting firm that it is difficult for their products to get shelf space at broker-dealers. In fact, no respondents disagreed about it being difficult, with the remaining 29% saying they were neutral. For so many recent entrants to the US ETF market, especially those launching niche or leveraged funds, that probably isn’t surprising, as broker-dealers tend to want track records, usually three years, before putting products on their platforms. There’s also the issue of compensation, as ETFs, unlike shares of mutual funds, don’t have distribution fees embedded in them. For newcomers, relying on distribution via RIAs is a challenging prospect to get enough scale to make their ETFs viable, said Kevin Lyons, a senior analyst at Cerulli.

“One of the advantages of converting a mutual to an ETF … is you can carry along that track record,” he said. “That allows you to jump over one of those initial obstacles for approval.”

Would You Like to Share That with the Class?

Fund shops have been adding new ETFs, or converting mutual funds to them, and that says a lot about demand. The SEC is on the cusp of approving the dual-share-class structure, and it’s clear that many companies don’t want to wait. While some of the larger asset managers that are first in line for that approval will be the first movers, it may take others some time to acclimate and catch up, Lyons said.

Other indicators of ETF demand, include:

• Among more than 800 US ETFs launched in the past 12 months through September, 86% were active products, and 37% of sales this year have gone to active products, according to a recent report by JPMorgan Asset Management.
• Nearly 9 in 10 ETF issuers are currently developing transparent active ETFs, Cerulli found.

If You Build It … An inevitable consequence of the deluge of new products, including novelty strategies and those focused on meme coins, is that there will be more ETF closures in the future. Asset managers are trying to balance keeping up with hot new product trends and keeping to their areas of expertise, Lyons said. “There are going to be some lessons learned in that.”

China’s not invited to the ETF party.

Last month, Vanguard launched its Emerging Markets ex-China ETF (VEXC), which has exposure to emerging markets equities — except ones classified as being based in China. The fund, which tracks the FTSE Emerging Markets ex-China index, is the latest example of emerging markets strategies leaving out the world’s second-largest economy. The idea is to avoid potential tariff-caused market swings, and other pitfalls, while taking advantage of growing investor interest in ex-China options.

“I get why there’s demand,” said Jeff DeMaso, editor of The Independent Vanguard Adviser. “I don’t think it’s unreasonable for an investor to say, ‘I like emerging markets. I like participating in the economic growth that those countries have. But I’m leery of China.’”

Xi’s All That?

Ex-China ETFs make up a relatively small proportion of all emerging markets funds; there were 14 of them as of October, and 10 have launched since the beginning of 2023 alone, according to Morningstar data. Others have existed for longer, like the iShares Emerging Markets ex-China ETF (EMXC) that launched back in 2017. Other ex-China funds include:

• Dimensional’s Emerging Markets ex China Core Equity ETF (DEXC), which launched late last year and is up 23% year to date.
• The Polen Capital Emerging Markets ex-China Growth ETF (PCEM), which also launched last year and is up 8% year to date.

Investors have been shying away from China in part because of the current administration’s ongoing trade war, as well as state-owned companies making up a large percentage of its market. The country also has issues with transparency and investor protection. “If you step back [and ask], ‘What are some of the fundamentals of strong long-term returns?’” DeMaso said. “You could argue [for a] free market, clear and consistent rule of law … There’s a long-term case here that China doesn’t check some of those boxes.”

Bull in a China Shop. Just because an economy is quickly growing, however, doesn’t mean it will outperform its slow and steady counterparts. Vanguard’s Developed Markets Index has roughly doubled the return of the Emerging Markets Index since 2009. As for emerging markets funds that include China, the iShares Core MSCI Emerging Markets ETF (MSCI) is “by orders of magnitude” the largest, said Morningstar passive strategies analyst Zachary Evens. China occupies more than a quarter of that fund’s holdings, Evens added. Whether to include China, then, becomes a matter of individual investor preference, according to DeMaso.

“I think if you’re an investor, it’s like, ‘Do I just want to index as broadly as possible?’ You should probably include some China in that,” he said. “I also think it’s reasonable for someone to say, ‘I would rather avoid that type of environment.’”

Someone’s Trian to buy Janus Henderson.

Activist investor Nelson Peltz’s hedge fund company Trian Partners is seeking to buy up the 80% of outstanding shares of Janus Henderson that it doesn’t already control and take the asset manager private. Last week the company, along with venture capital firm General Catalyst, submitted an offer to pay a roughly 12% premium on the shares. It’s unclear if Janus Henderson will accept the offer, though the firm’s board assembled a committee to contemplate the proposal. For now, the company isn’t saying much beyond that. If Janus does accept a go-private deal, it would further shake up a business that has gone through considerable changes in the past decade.

“Trian’s $7 billion bid for Janus Henderson marks a shift from activism to acquisition — and could spur more M&A,” said Cindy Zarker, relationship manager at Fuse Research Network. “However, Janus Henderson being taken private by an external investor like Trian/General Catalyst is fundamentally different from a strategic acquisition by another asset manager or a company’s founder(s) or employees buying itself back.”

Tech’s Tack

On its own, General Catalyst’s interest in Janus Henderson would turn some heads. The VC firm invests heavily in fintech, and artificial intelligence is a theme across its holdings (among numerous companies in its portfolio is Anthorpic, for example). But what may be General Catalyst’s biggest, most publicized (and scrutinized) project is buying a hospital. It is in the process of acquiring Ohio-based Summa Health, with the intention of overhauling it by infusing AI into operations across the healthcare system. Trian’s partnership with General Catalyst “suggests a plan to modernize Janus Henderson’s platform through digital transformation/fintech integration,” Zarker noted.

Janus Henderson already has a relationship with Trian:

• Janus Capital Group, founded in Denver in 1969, merged with 1934-founded Henderson Group in 2017, with the resulting company’s headquarters based in London.
• Trian disclosed its holdings in Janus Henderson in 2020, and under pressure from Peltz, then-CEO Dick Weil stepped down in 2022, being replaced by Trian-supported and current CEO Ali Dibadj, who was previously CFO at AllianceBernstein.
• Activism at an asset manager isn’t new for Peltz, who had two stints on Legg Mason’s board starting in 2009, before selling his stake in the company ahead of Franklin Templeton’s purchase of that firm.

Is There an Upside? Peltz has characterized the private-ownership offer as necessary to help “derisk” Janus Henderson. Still, he hasn’t always gotten what he wanted. Last year, amid a proxy fight with Disney’s board, the Trian CEO criticized the House of Mouse for Marvel movies that featured predominantly Black or women casts, in an interview with the Financial Times. After failing to win seats on the board, he reportedly sold his stake in the company but walked away with about $1 billion in gains. One of his favored phrases at the office, according to The Wall Street Journal: “I’d rather be rich than right.”