Largest Active ETFs: A Growing Market Trend

The world of active ETFs is growing rapidly, with some of the largest players in the market leading the charge. The top 10 largest active ETFs have seen significant growth in assets under management, with some experiencing a 50% increase in just one year.

Investors are flocking to these funds due to their strong track records and ability to outperform the market. The largest active ETFs have consistently demonstrated their ability to adapt to changing market conditions and provide stable returns.

One notable example is the Vanguard FTSE Developed Markets ETF, which has seen assets under management grow to over $10 billion. This fund's success can be attributed to its diversified portfolio and low fees, making it an attractive option for investors.

Actively managed funds are a type of investment where a fund manager chooses the securities to invest in, rather than following a specific index or rules-based strategy.

The performance of an actively managed fund is dependent on the investment selection of the manager, who aims to outperform a market benchmark.

Actively managed funds are available in the form of exchange-traded funds (ETFs), which have lower costs than traditional mutual funds, increasing the likelihood of achieving the goal of outperforming a market benchmark.

The goal of an actively managed fund is to beat the market, and the fund manager's investment selection is crucial to achieving this goal.

Lower costs are a key advantage of actively managed ETFs, making it easier for the fund manager to achieve their goal of outperforming a market benchmark.

Actively managed funds have grown significantly in recent years, with a five-year annual growth rate of over 40% from $112 billion in 2019 to $663 billion by the end of May 2024.

The lower cost of active ETFs increases the likelihood of achieving the goal of outperforming a market benchmark by reducing the investment returns required by the fund manager.

Active ETFs offer investment strategies that seek to add value or reduce risk relative to traditional indices, building upon the benefits offered by passive ETFs.

In 2022, approximately 15% of flows into ETFs, $90 billion, were directed to active ETFs despite active ETFs representing only 5% of the assets.

Active ETFs have experienced significant growth, with 21% of flows into ETFs, $125 billion, going to active ETFs in 2023, representing only 6% of the assets.

Over the last few years, active ETFs have become a larger share of total ETF flows, with over 31% of flows going to active ETFs through May 2024, over $100 billion in absolute terms.

Investors use active ETFs as core holdings, just like they use passive ETFs, to create a solid foundation for their portfolios.

Active ETFs can also be used as satellite positions to complement existing passive index-tracking allocations or to express specific investment views or themes.

By employing active ETFs, investors can quickly adjust exposures based on changes in market outlook or economic conditions, helping to manage downside risk or volatility.

Tax management strategies are also employed by active ETFs, such as tax-loss harvesting, to minimize tax liabilities and maximize returns.

Active ETFs offer a unique combination of lower costs and higher return potential compared to actively managed mutual funds. This is due to the inherent cost advantages of exchange-traded funds.

The elimination of sales charges that compensate financial advisors and operational expenses for large shareholder servicing departments results in active ETFs being priced much cheaper than an actively managed mutual fund equivalent. This is a significant benefit for DIY investors.

By reducing operational expenses and brokerage commissions, fund managers can improve net investment returns to investors. This means more money in your pocket at the end of the day.

Active ETFs have grown significantly in recent years, from $112 billion in 2019 to $663 billion by the end of May 2024, a five-year annual growth rate of over 40%.

Active ETFs offer the opportunity for improved tax-efficiency similar to passive ETFs.

Because investors can buy and sell ETF shares on a stock exchange just like stocks, portfolio managers don't have to raise cash when there is enough marketplace liquidity to fill sell orders.

This process avoids the need for portfolio managers to sell securities, which can trigger capital gains taxation.

Authorized participants, known as market makers, can create or redeem 'creation units' in exchange for a basket of securities held by the ETF, further reducing the need for cash sales.

This in-kind creation and redemption process avoids the sale of securities and hence capital gains taxation.

You can buy and sell shares in active ETFs during the trading day while the stock exchange is open. This is a key advantage over actively managed mutual funds, which are generally priced only once each day after the market close.

Investors in mutual funds won't know the net asset value (NAV) at any point during the trading day. They'll only learn the NAV after the market close.

The assurance of transacting shares at the fund's NAV is a disadvantage of mutual funds.

Active ETFs are used as core holdings, similar to passive ETFs, to provide a solid foundation for a portfolio.

They can also be used as satellite positions to complement existing passive index-tracking allocations or to express specific investment views or themes.

Investors use active ETFs to manage downside risk or volatility, quickly adjusting exposures based on a change in market outlook or economic conditions.

Active ETFs can employ tax management strategies like tax-loss harvesting, making them a more appealing option for investors who prioritize tax efficiency.

Active ETFs can experience a relatively large spread between the market price of the fund and the fund’s net asset value (NAV) on days with high market and trading volatility.

This spread is known as a discount or premium to NAV. A discount means the fund is trading at a lower share price than the per share value of the ETF’s underlying holdings.

If the ETF is traded at a premium, the share price is higher than the combined value of the fund’s holdings on a per share basis.

Authorized participants play a valuable role in minimizing the frequency and magnitude of ETF shares trading at a premium or discount to NAV by executing trades to bring the ETF’s share price back in line with its NAV.

Mutual funds have the highest relative cost, typically.

Passive ETFs, on the other hand, have the lowest relative cost, making them a more affordable option for investors.

Passive ETFs track an index or popular benchmark, whereas mutual funds do not.

Mutual funds and active ETFs both seek to outperform the market or its benchmark, but passive ETFs do not.

Passive ETFs are known for their tax-efficient structure, which is also a characteristic of active ETFs.

Here's a comparison of mutual funds and passive ETFs:

SPDR offers a range of actively managed fixed income ETFs, including the SPDR Blackstone Senior Loan ETF (SRLN) and the SPDR Blackstone High Income ETF (HYBL).

These ETFs are designed to provide investors with access to actively managed portfolios that can help navigate changing market conditions.

The SPDR DoubleLine Total Return Tactical ETF (TOTL) and the SPDR DoubleLine Short Duration Total Return Tactical ETF (STOT) are examples of ETFs that use a tactical approach to investing.

Here are some examples of actively managed ETFs offered by SPDR:

SPDR also offers a range of other actively managed ETFs, including the SPDR Nuveen Municipal Bond ETF (MBND) and the SPDR Nuveen Municipal Bond ESG ETF (MBNE).