Active ETF assets balloon. Why only a few funds dominate.
Asset managers launched a record 660 active ETFs last year, according to a new research report from Broadridge Financial, but only a few may reach “escape velocity.”
In a gold rush, a few pioneers can strike it spectacularly rich while many other prospectors go home empty-handed. That may be an apt description for what’s transpiring in the asset management industry as companies rush to launch more actively managed exchange-traded funds amid surging demand from investors and financial advisors.
Assets in active ETFs are growing fast.
Asset managers launched a record 660 active ETFs last year, according to a new research report from Broadridge Financial, a financial technology company. Assets in active ETFs soared to $631 billion in 2024 from $81 billion in 2019. They could reach $1.239 trillion by 2027, according to Broadridge.
Despite spectacular growth, the active ETF market is highly concentrated, Broadridge’s report shows. The top three managers control 48% of assets. The top 10 control 77%.
“Over time, there’s been so many new products, but not that many have reached escape velocity," says Davis Walmsley, head of U.S. solutions, Broadridge Data and Analytics.
That’s partly due to first mover advantage as well as certain asset managers’ ability to launch timely products and ensure widespread distribution. The Broadridge study found that success in active ETFs has been highly correlated with success at first-year asset raising. Eleven percent of active ETFs raised more than $100 million in the first year following their launch; that group of funds now represents two-thirds of active ETF assets, according to Broadridge.
Of those funds that don’t achieve escape velocity, some may close, but others may stick around either because the funds themselves are profitable enough or because of inertia. “Managers are slow to take product off the shelf," Walmsley says.
Investors and financial advisors have come to favor ETFs over mutual funds because of their transparency and tax-efficiency. Flows into passive and active ETFs hit a record $1 trillion last year. Companies such as Vanguard have been launching a steady stream of new actively managed ETFs.
Meanwhile, actively managed mutual funds are struggling. Broadridge projects negative 3% organic growth between 2024 and 2027. Among professional investors, registered investment advisors have been the biggest adopters of ETFs for client portfolios, according to Broadridge. Walmsley attributes this partly to technology differences between independent advisors and advisors who work at national brokerage firms. The national brokerage firms also have potentially lengthier processes and other hurdles for funds to get on their platforms.
That makes asset managers’ distribution strategies a critical determinant of an ETF’s ability to attract assets. If your product isn’t on the shelf at the store, no one’s going to buy it.
The good news for asset managers is that advisors, RIAs in particular, are eager to move more assets into ETFs. Walmsley says Broadridge surveyed RIAs, and 59% said they would replace more or all of their mutual funds with ETFs. “On average, the mean was about 2.5 years from a timing perspective," he says. “So it’ll take time to see the shift, but I think we’ll see a consistently high growth rate for the ETF channel."
Write to Andrew Welsch at andrew.welsch@barrons.com
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