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The Rise of Active Management in the ETF Industry
The Growing Popularity of Active ETFs
The exchange-traded fund (ETF) industry has traditionally been dominated by passive funds that track indexes or themes. However, the recent rise in interest rates and volatility in the stock market has sparked renewed interest in active management. Active ETFs, which are managed by professional managers who aim to outperform the market, have been growing rapidly in popularity. In fact, active ETFs have attracted $100 billion of net inflows over the past 12 months, according to a report from State Street.
Exchange-traded funds (ETFs) have been growing in popularity in recent years. ETFs are a type of investment fund that is traded on an exchange like a stock. This makes them a more liquid investment than traditional mutual funds, which are not traded on an exchange. ETFs also offer a number of other advantages, such as lower fees and more transparency.
There are a number of reasons for the growing popularity of ETFs. First, ETFs are a more convenient way to invest. They can be bought and sold just like stocks, so investors can easily add or remove them from their portfolios. Second, ETFs offer a wider range of investment options than traditional mutual funds. There are ETFs that track a wide variety of asset classes, including stocks, bonds, commodities, and currencies. Third, ETFs tend to have lower fees than traditional mutual funds. This is because ETFs are not actively managed, which means that there are no investment professionals who are paid to pick stocks or bonds for the fund.
As a result of these advantages, ETFs have become a popular investment choice for both individual investors and institutional investors. In 2021, the global ETF market was worth over $9 trillion. This is expected to grow to over $15 trillion by 2025.
Here are some of the benefits of investing in ETFs:
- Liquidity: ETFs are traded on exchanges, which means that they can be bought and sold easily. This makes them a more liquid investment than traditional mutual funds, which are not traded on an exchange.
- Low fees: ETFs tend to have lower fees than traditional mutual funds. This is because ETFs are not actively managed, which means that there are no investment professionals who are paid to pick stocks or bonds for the fund.
- Diversification: ETFs offer a wide range of investment options, which can help to diversify your portfolio. This can reduce your risk and improve your chances of achieving your investment goals.
- Transparency: ETFs are transparent investments. This means that you can easily see what assets are held in the fund and how the fund is managed.
If you are considering investing in ETFs, it is important to do your research and choose the right ETFs for your investment goals. You should also consider the fees associated with ETFs and how they will impact your returns.
A Shift in Wall Street Dynamics
The rise of active ETFs could potentially disrupt the industry's dominant players and allow other Wall Street firms to enter the market. JPMorgan, for example, saw its active business perform so well that it became the second biggest ETF issuer by net inflows in the first half of this year, surpassing both BlackRock and State Street and trailing only Vanguard. This growth in active ETFs is attributed to a Securities and Exchange Commission rule change in 2019 that made it easier to launch innovative strategies in ETF format, as well as the conversion of some active mutual funds into ETFs.
The entry of ETFs into the market has had a number of significant changes on Wall Street dynamics. First, ETFs have made it easier for investors to get exposure to a wide range of asset classes. This has led to increased trading volume and volatility in the markets. Second, ETFs have made it more difficult for active managers to outperform the market. This is because ETFs are passively managed, which means that they track an index, such as the S&P 500. As a result, active managers have to work harder to beat the market, which has led to higher fees for investors.
Third, ETFs have made it easier for retail investors to participate in the markets. This is because ETFs are traded on exchanges, just like stocks. This makes them more accessible to retail investors than traditional mutual funds, which are not traded on exchanges. As a result, the entry of ETFs has led to increased participation from retail investors in the markets.
Overall, the entry of ETFs into the market has had a significant impact on Wall Street dynamics. ETFs have made it easier for investors to get exposure to a wide range of asset classes, increased trading volume and volatility in the markets, made it more difficult for active managers to outperform the market, and made it easier for retail investors to participate in the markets.
Here are some additional changes that have been brought about by the entry of ETFs to the market:
- The rise of passive investing: ETFs have made it easier for investors to invest in passive index funds, which track a specific market index. This has led to a decline in active investing, as more and more investors are choosing to invest in ETFs instead of actively managed mutual funds.
- The growth of the ETF market: The ETF market has grown significantly in recent years, and it is now one of the largest asset classes in the world. This growth is expected to continue in the years to come, as more and more investors become aware of the benefits of ETFs.
- The changing role of brokers: The entry of ETFs has changed the role of brokers. In the past, brokers were responsible for helping investors pick individual stocks and bonds. However, with the rise of ETFs, brokers now play a more advisory role, helping investors choose the right ETFs for their investment goals.
The entry of ETFs into the market has had a significant impact on Wall Street dynamics. It has made it easier for investors to get exposure to a wide range of asset classes, increased trading volume and volatility in the markets, made it more difficult for active managers to outperform the market, and made it easier for retail investors to participate in the markets. These changes are likely to continue to shape the way Wall Street operates in the years to come.
The Success of JPMorgan's Active ETFs
JPMorgan's active ETFs have been particularly successful in capturing investor interest. The JPMorgan Equity Premium Income ETF (JEPI) has become the largest actively managed ETF on the market, with approximately $28 billion in assets. The fund's defensive stock holdings and income generated through derivatives have made it a popular choice among investors. JPMorgan also holds the title for the largest active ETFs in both equity and fixed income, as it knocked off its own product, the Ultra-Short Income ETF (JPST), which also holds over $20 billion in assets. Other active equity funds from JPMorgan, such as the JPMorgan Active Value ETF (JAVA) and the JPMorgan Active Growth ETF (JGRO), have also seen strong inflows this year.
The Benefits of Active Management
The increased interest in active management can be advantageous for firms like JPMorgan, as they have a deep bench of experienced fund managers from their mutual fund business. Additionally, active ETFs like JEPI offer investors a different way to manage their portfolios compared to traditional stock index funds. These funds allow investors to drive specific investment outcomes, such as generating income and reducing volatility. Despite the long-term underperformance of many active fund managers, the continued large size of the mutual fund market indicates a strong appetite for active management that ETFs can tap into. JPMorgan's global head of ETF solutions, Bryon Lake, believes that active management will continue to grow at a rapid rate.
The Future of Active Management in the ETF Industry
Disruption and Opportunities
The rise of active management in the ETF industry presents a unique opportunity for new businesses looking to enter the market. With the growing popularity of active ETFs and a shift in Wall Street dynamics, there is room for potential disruption and a chance to challenge the dominance of established players. The success of JPMorgan's active ETFs, which have attracted significant investor interest, proves that there is space for innovation and growth in this space.
Benefits and Considerations
Active management offers distinct advantages for investors, allowing them to pursue specific investment outcomes and potentially outperform the market. As seen with JPMorgan's active ETFs, portfolios with defensive stock holdings and income generation capabilities have resonated well with investors. Additionally, active ETFs provide a different approach to managing portfolios compared to traditional index funds, giving investors a wider range of options and flexibility.
A Growing Appetite for Active Management
Despite the historical underperformance of many active fund managers, the continued large size of the mutual fund market indicates a strong appetite for active management that ETFs can tap into. The $100 billion of net inflows into active ETFs over the past year showcases this demand. New businesses entering the industry can leverage this trend by offering innovative, actively managed strategies that cater to investors' specific needs and preferences.
In conclusion, the rise of active management in the ETF industry presents both disruption and opportunities for new businesses. By capitalizing on the growing demand for active ETFs, firms can compete with established players and provide investors with unique investment strategies and outcomes. As the industry continues to evolve and investors seek alternatives to passive funds, active management stands poised for rapid growth and transformation.
Article First Published at: https://www.cnbc.com/2023/07/08/active-funds-are-powering-jpmorgans-etfs-past-rivals-heres-why-it-may-continue.html