Yes, Virginia, there are Active ETFs…

Exchange Traded Funds (ETFs) are usually associated with passive approaches that track broad-based market indexes. And rightly so – of the $11.1tn of global Assets Under Management (AUM) wrapped in these structures, around $10.4tn, or 94%, is passive, leaving just $700bn, or 6%, in Active ETFs.
But there has never been a legal or regulatory reason to prevent active strategies from using the ETF structure, rather it has been operational issues that have typically meant managers have stuck to mutual funds. That is changing.
We address the main pros and cons of the two principal fund structures, mutual fund and ETF, in the specific context of active and passive strategies, and how, and why, the industry landscape is changing. We use a Q&A approach.

The Big Picture

Set the scene for me, of all the global assets under management (AUM) how much is active and passive, and of all the AUM in ETF structures, how much is active and passive?

According to the October 2023 report, The World’s Largest Asset Managers, by the Thinking Ahead Institute and Pensions & Investments, the 500 biggest fund managers in the world together manage around $114tn as at the end of 2022. If we use that as a decent proxy for all globally invested assets, then the report further states that actively managed strategies are about 65% of that total, and passive 35%. Keep in mind that different organizations define these terms in different ways and put different parameters around the question (such as US versus global, or discretionary versus non-discretionary), so you may see a range of numbers on this topic, but these proportions are aligned with much of what we have seen in the industry over the years.

Now, if we zoom in, and look at just the ETF market, the comparable numbers, according to Morningstar as at the end of 2023, are a total market size of about $11.1tn, of which $10.4tn is in passive strategies, and $700bn is in active. So, in the ETF market only around 6% of AUM is active (versus 65% for all AUM in total). But it is enough that, unlike with Santa, you can’t doubt the existence of Active ETFs (hence the title of this piece - Virginia you may rest assured).

“Please tell me the truth, is there a Santa Claus”

Virginia O’Hanlon, 1897

So, is it fair to say that ETFs are typically thought of as passive for good reason?

Absolutely. If just 6% of the ETF market is active, compared to 65% in the broader industry, then investors are right to equate ETFs in their minds to passive strategies – at least so far.

But of course, it is this last caveat that’s interesting. Because if one looks at the composition of the ETF market over time then it tells a very different story. Figure One shows the percentage of global ETF AUM that is allocated to active. Although we have referred so far to “just” 6%, that share has grown quite significantly in a relatively short time, from 0.35% of the market in 2008, to 6.43% in 2023. So, we need to be very clear on two distinct, but likely related, trends in the asset management industry. The first is the much talked about growth of passive strategies versus active strategies across all AUM in total, and the second is the growth of active strategies versus passive strategies across all ETF AUM. Yes, these seem contradictory.