Active ETFs Ready for Their Close Up
Financial Advisor IQ
Informing, educating, and connecting financial advisors with daily news and a dynamic database of industry research.
Welcome to Deconstructed, a weekly newsletter from Financial Advisor IQ that breaks down news and perspectives on portfolio construction.
A pair of actively managed exchange-traded funds launched last month by BlackRock indicate the $10 trillion-ish asset manager could be trying to get ahead of a trend.
While better known for its passive iShares ETFs, BlackRock has ever so quietly doubled its active ETF offerings over the past year. That buildout is in response to what a company executive called "tremendous" uptake, primarily by registered investment advisors, Financial Advisor IQ's sister publication Ignites reported.
New ETFs are making their market debuts at a record pace this year, but actively managed offerings are breezing past their passive index-following counterparts – and gaining momentum.
Of the 236 ETFs launched so far in 2024, 166 are actively managed, Morningstar said last week. For comparison, there were 155 total ETFs launched by the same point of 2023, including both active and passive strategies.
BlackRock's two latest roll-outs – its Long-Term U.S. Equity ETF and High Yield ETF – brought the firm's active ETF stable to 40 products, representing $25 billion of assets under management in the U.S., according to Ignites, which cited a MarketWatch interview with Jay Jacobs, U.S. head of thematic and active ETFs at BlackRock.
"We're seeing tremendous and growing demand for active ETFs broadly," Jacobs said, singling out RIAs and their clients. "It's important for us to make sure that we are bringing out our best strategies, where we have the most client demand, in the ETF structure."
Both ETF launches invest similarly to preexisting mutual funds.
Meanwhile, RIAs had total net assets in active ETFs of $233.6 billion, or about 48% of the total industry net assets of active ETFs, beating out banks, broker-dealers, discount platforms and wirehouses, BlackRock noted in its launches, citing Broadridge data.
Happy Together
ETFs have become an "important building block" for model portfolios, now accounting for 54% of their allocations, a new Cerulli Associates study found. ETFs surpassed mutual funds for model allocation supremacy in April, Ignites reported.
Some 12% of financial advisor assets are held within practices "that primarily use model portfolios as their portfolio construction process," but Cerulli estimates that 24% of assets lie with advisor teams that start with models but modify or customize them on a client-by-client basis.
"The industry will continue to see model adoption, as wealth manager home offices push advisors toward them and advisors realize the resulting benefits," Matt Apkarian, associate director at Cerulli, wrote in the report.
Just 31.4% of model portfolio assets are in proprietary ETFs while 27.1% are in nonproprietary ETFs, Cerulli reported, suggesting that use of ETFs within models isn't restricted to model providers funneling their own ETFs into the portfolios.
Recommended by LinkedIn
Some recent active ETF entrants, including AllianceBernstein, have products approaching three-to-five-year track records that may make them more appealing for model portfolio construction, Ignites noted.
But not all model providers are so keen to add active ETFs to their mix.
Active ETFs' higher fees, relative to their passive counterparts, can be a big turnoff for investors, noted William Roach, president of model provider Globlalt.
Read more here.
Video of the Week
Despite a large focus on the growth of active ETFs, assets in those products still pale in comparison to their passive counterparts, said LSEG Lipper Senior Research Analyst Jack Fischer.
Active ETFs are "only roughly 8% of the overall market. We've got 92% of the ETF market in passive assets," Fischer told Ignites.
To watch the video, click here or on the image below.
Keep Reading...