Market Overview

Active Equity ETFs Are Coming Of Age

Active Equity ETFs Are Coming Of Age

When it comes to actively managed exchange traded funds, fixed income funds are the dominant asset class, but some actively managed equity ETFs are increasing their asset bases.

Overall, actively managed ETFs command just 2 percent of the $3.9 trillion in U.S. ETF assets under management, but that figure is poised to increase.

What Happened

“Actively-managed ETFs comprise 2% of the $3.9 trillion in overall ETF assets, but last year these ETFs pulled in $28 billion of net inflows, quadruple what they gathered two years earlier,” said CFRA Research Director of ETF & Mutual Fund Research Todd Rosenbluth in a note out Tuesday. “Indeed, while 2018 overall net inflows of $283 billion were nearly identical to the demand in 2016, the market share for active funds rose to approximately 10 percent.”

Just two equity-based actively managed ETFs – the First Trust North American Energy Infrastructure Fund (NYSE: EMLP) and the ARK Innovation ETF (NYSE: ARKK) – have more than $1 billion in assets under management. Just two others, including another ARK fund, have more than $500 million in assets.

Why It's Important

“Actively-managed equity mutual fund strategies have been pressured in recent years as more investors understand the challenges of consistently beating a low-cost index like the S&P 500 and sought out cheaper alternatives,” said Rosenbluth. “Indeed, 21 percent of U.S. large-cap mutual funds outperformed the ‘500’ in the three years ended 2018, while just 16 percent of global equity mutual funds beat the S&P Global 1200 index. However, active equity ETFs assets climbed 32% in the one-year period ended March 2019 to $12.8 billion.”

While performance is often an issue with actively managed equity funds, EMLP and ARKK are proving to be exceptions to that trend. Over the past 36 months, EMLP is beating the largest passive MLP ETF by a margin of better than 4-to-1. During the same period, ARKK is delivering better than double the returns of the Nasdaq-100 Index.

Year-to-date, ARKK is up 31.3 percent and that is with an almost 10.5 percent weight to shares of Tesla, Inc. (NASDAQ: TSLA), a stock that's down almost 26 percent this year.

What's Next

In terms of what's next for actively managed equity ETFs, perhaps some diversity at the issuer level. Of the 15 largest actively managed equity ETFs, 10 hail from just three issuers, including ARK and First Trust.

CFRA has a Marketweight rating on EMLP and an Underweight rating on ARKK.

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