2021 was a record year for active ETFs with strong inflows across a wide variety of funds. With such growth and broad usage, Matt Bartolini argues that there is strong possibility for active ETFs to surpass $400 billion by the end of 2022.
Active ETFs continued to flourish in 2021, with a record number of launches, flows, and the continuation of a 14-year streak of taking share away from passive ETFs within the US-listed ETF industry1 — the inverse of the trend for active mutual funds.
Performance trends have also been strong, most notably in fixed income. Combined with lower fees and improved tax efficiency versus active mutual funds, and a growing number of strategy types, active ETFs are likely to replace active mutual funds as the vehicle of choice when seeking to generate alpha within portfolios.
2021 Saw Record-Setting Flows
Active ETFs witnessed record-setting flows in 2021, taking in $90 billion — 44% more than the 2020 record of $62 billion.2 Flows were positive in every month and never dipped below $2 billion. In fact, active ETFs ended 2021 with 21 consecutive months of inflows.3
These flows were not the result of a few large funds getting larger either, as 86% of all active ETFs had inflows in 2021 — a higher participation rate than the rest of the US-listed ETF industry (72%).4 It is also the highest participation rate for active ETFs in a calendar year.
This depth trend is reinforced by the fact that the active strategy with the most flows (+$6.8 billion), our SPDR Blackstone Senior Loan ETF [SRLN], was the 22nd largest active fund at the start of 2021.5 After witnessing a 304% growth rate, it ended the year as the fourth largest active ETF overall.6 Its trading volume grew by 188%, trading over $20 billion on the year,7 as its usage as a credit market liquidity tool increased – just one example of an expanding portfolio use case for active ETFs.
The flows were tilted more heavily towards equity, seeing 50% of flows, while fixed income strategies garnered 37%. This is a shift from the early phase of the active ETF market, when many of the flows and assets were skewed towards fixed income. In fact, last year was the first time since 2014 where equity had more inflows than fixed income, as shown below.
Interestingly, and evidence of expanding use cases and strategy types, the “other” category within active ETFs has steadily grown. In 2021, the “other” category took in its highest flows ever in a calendar year, accounting for 13% of all active flows even though they made up just 3% of all active ETF assets to start the year.8
Active ETF Flows by Asset Class ($ Billions)
The consistent and persistent inflows have pushed total assets to a record high, with active ETFs ending the year with $292 billon.9 But not all of the flows or assets went to established strategies.
There were 466 funds launched in 2021; 306 (or 66%) were active.10 Both the number and percent of all launches are a record for active ETFs. Those new funds had $20 billion of inflows and ended the year with $62 billion of assets, given the number of conversions that took place which do not register as “new” fund flows.11
With such growth, and broader usage, the potential for active ETFs to surpass $400 billion in assets by the end of 2022 is a real possibility. Based on an eight-factor trend model, our projection for active ETF assets by the end of 2022 is $420 billion, with assets increasing to over $600 billion by 2023.12
Inverse Trends for ETFs and Mutual Funds
Every year for the last 15 years, active ETFs have had inflows, and they are currently on a 21-month streak of consecutive inflows.13 Meanwhile, active mutual funds have been trending in the opposite direction, seeing outflows every year since 2015 and outflows in 12 of the last 14 years.14
Given this trend, active mutual funds now make up 73% of the mutual fund market, down from 88% ten years ago. Conversely, active ETFs have grown their market share over this time period. Ten years ago they made up a scant 0.40% of the US-listed ETF industry and are now 5%, as shown below.
Active ETF Market Share on the Rise
Some of this growth is a result of an increase in choice, as ten years ago there were only 68 active ETFs spread across 37 Morningstar categories. Now there are nearly 800 funds spanning 83 different Morningstar categories.15
Beyond the increase in choice, there are also structural elements of the ETF construct that have led to greater interest than in their mutual fund counterparts — a “structural alpha” effect — as a result of noticeably lower fees and improved tax efficiency:
Fees: The average active ETF has a 0.71% expense ratio versus 0.90% for active mutual funds.16
Cap Gains: Over 66% of active mutual funds paid capital gains last year, compared to just 19% for active ETFs.17
There is also the potential for performance-related alpha, in addition to the “structural alpha” generated by active ETFs. The return alpha is most apparent within fixed income, as the median excess return for active bond ETF managers over the last 1-, 3-, and 5-year periods is above that of the median active bond mutual fund manager. The percentage of managers outperforming their benchmark over each one of those periods is also greater for active bond ETFs than active bond mutual funds, as shown in the next chart. The underlying category makeup is not an apples-to-apples comparison, but the larger point of not having to sacrifice on performance when using an active ETF holds.
ETFs See Higher Excess Returns Across a Larger Percentage of Funds
State Street SPDR Active ETF Solutions
Our suite of 12 transparent active ETFs harnesses the structural components of the ETF market and wrapper while blending our in-house expertise with skilled sub-advisory relationships. And with an average fee of 50 basis points, our suite has a fee that is 32% below that of the average fee within each of the fund’s peer Morningstar category.18
The suite covers a diverse selection of strategies, whether investors seek to build a portfolio for risk management, packaged tactical asset allocation, alpha or income generation within specific market segments and asset classes.
1Bloomberg Finance L.P., as of December 31, 2021, based on SPDR Americas Research calculations. 2Bloomberg Finance L.P., as of December 31, 2021, based on SPDR Americas Research calculations. 3Bloomberg Finance L.P., as of December 31, 2021, based on SPDR Americas Research calculations. 4Bloomberg Finance L.P., as of December 31, 2021, based on SPDR Americas Research calculations. 5Bloomberg Finance L.P., as of December 31, 2021, based on SPDR Americas Research calculations. 6Bloomberg Finance L.P., as of December 31, 2021, based on SPDR Americas Research calculations. Growth rate is derived from flows as percent of start-of-year assets. 7Bloomberg Finance L.P., as of December 31, 2021, based on SPDR Americas Research calculations. 8Bloomberg Finance L.P., as of December 31, 2021, based on SPDR Americas Research calculations. 9Bloomberg Finance L.P., as of December 31, 2021, based on SPDR Americas Research calculations. 10Bloomberg Finance L.P., as of December 31, 2021, based on SPDR Americas Research calculations. 11Bloomberg Finance L.P., as of December 31, 2021, based on SPDR Americas Research calculations. 12Bloomberg Finance L.P., as of December 31, 2021, based on SPDR Americas Research calculations. Model includes a 10-year, 5-year, and 3-year lookback for both year-over-year asset growth and share of flows. Other factors are average 60-month and 36-month flows extrapolated based on today’s starting asset level. 13Morningstar and Bloomberg Finance L.P., as of December 31, 2021, based on SPDR Americas Research calculations. 14Morningstar, as of December 31, 2021, based on SPDR Americas Research calculations. 15Morningstar, as of December 31, 2021, based on SPDR Americas Research calculations. 16Morningstar, as of December 31, 2021, based on SPDR Americas Research calculations. 17Morningstar, as of December 31, 2021, based on SPDR Americas Research calculations. 18Morningstar, as of December 31, 2021, based on SPDR Americas Research calculations. Average manager in the peer category is 0.75%.
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