Active ETFs Are Crashing The Passive Party

Actively-managed ETFs grew at a 6% organic growth rate in the second quarter of 2023, and 14% in the first half of the year, while passive ETFs grew at 3%

Ollie Smith 3 August, 2023 | 11:15AM
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Global funds and exchange-traded funds (ETFs) witnessed $54 billion (£46.2 billion) of inflows in the first half of 2023, and only one category group had inflows: fixed income.

In Morningstar's latest global flows report, senior editorial director Syl Flood shows that the $236 billion flows into fixed income strategies more than made up for all other groups under Morningstar coverage. 

But other stark figures show longer-term changes in the investment landscape.

"ETFs enjoyed their 113th straight month of inflows in June, [and] open-ended funds had inflows for this month but had outflows in 16 of the previous 17 months," Flood says.

"Actively-managed ETFs are steadily gaining acceptance. They grew at a 6% organic growth rate in the second quarter of 2023, and 14% in the first half of the year, while passive ETFs grew at 3%."

Active is under pressure elsewhere, however. While it still dominates the fixed income world, passive fixed income strategies are coming to eat its lunch. Passive fixed income funds have now grown to 29% of global fixed income assets at the end of June – a dramatic increase from the 9% recorded at the end of 2008.

"Over that span, passive strategies have captured $2.8 trillion in flows – $1.8 trillion of which is in ETFs – while their actively-managed counterparts have take in $3 trillion," Flood adds.

Fund House Giants

In terms of fund houses, BlackRock-owned iShares was in the top spot for investor flows, logging a $66 billion dollar net flow in the first six months of the year. That was closely followed by passive giant Vanguard ($59 billion) and JPMorgan ($40 billion).

Though JP Morgan was third in this regard, its organic growth rate far surpassed its peers at 5.6% for the first half of the year. iShares and Vanguard logged growth of only 2.28% and 0.89%, respectively.

The world's largest index funds may have dominated the flows league, but JP Morgan, Fidelity and Pimco all found themselves crashing the passive party.

JP Morgan's Equity Premium Income – the most successful ETF launch ever – and the company's Morningstar Bronze-rated (US) Large Cap Growth fund combined to bag $23 billion. The US and European versions of Pimco Income, meanwhile, scooped $14 billion of investor cash.

ESG is Fighting Back

In the face of performance concerns and political opposition, meanwhile, ESG funds continue to demand the attention of investors worried about the future.

"Despite – or perhaps because of – the backlash against ESG investing, investors have put more money into sustainable funds than nonsustainable funds for the year-to-date," Flood says.

"The former tallied $51 billion, while the latter lapped up just $2 billion. Sustainable flows have remained robust in Europe but were negative in the US in the first half of 2023."

That said, the organic growth rate of sustainable funds is converging with that of their nonsustainable counterparts, the report shows. Having enjoyed phenomenal inflows in the pandemic, growth rates are currently around the 2% mark.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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Ollie Smith

Ollie Smith  is editor of Morningstar UK

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