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Market Update

7 Charts on the Rapid Ascent of Active ETFs

Though tiny, active exchange-traded funds generated an outsize share of flows in 2021.

Actively managed exchange-traded funds experienced a coming-of-age last year. 

The sector saw $87 billion of inflows and funds like Ark Innovation ETF ((ARKK)) dominated headlines. Altogether, the amount of money in active ETFs grew by 44% to $295 billion.

Active ETFs straddle the ETF and active fund universes and exercised an outsize influence on both in 2021. Their popularity wasn't limited to a single area as investors bought up sector equity funds and municipal-bond active ETFs with similar fervor, while the same could not be said for active open-end mutual funds. As with any investment vehicle, active ETFs have advantages and drawbacks. One is lower fees compared with actively managed open-end funds. Though some of the largest active ETFs also carry higher-than-average expenses.

"There were a host of different factors that drove flows toward active ETFs last year," says Ben Johnson, Morningstar director of global exchange-traded fund research. "But some of the biggest were rising inflation (which drove flows to Invesco Optimum Yield Diversified Commodity Strategy No K-1 ETF (PDBC) and Quadratic Interest Rate Volatility and Inflation Hedge ETF (IVOL)), expectations for rising rates (driving flows to SPDR Blackstone Senior Loan ETF (SRLN) and First Trust Senior Loan ETF (FTSL)), popular new launches (ProShares Bitcoin Strategy ETF (BITO)), and hop-ons still scrambling aboard 2020's highfliers (ARKK)," he says.

Investors shunned actively managed funds for years. Active funds as a group, including ETFs and open-end funds, experienced net outflows from 2015 to 2020. But investors returned to actively managed funds last year, due in part to the influence of active ETFs. While they represent only 2% of active funds, ETFs accounted for 35% active fund inflows in 2021.

Even in the area where investors have been most resistant to active management--the U.S. equity fund universe--ETFs drew interest. Investors returned to actively managed ETFs, while on net pulling money from open-end funds.

The influence of active ETFs was large even in the overall ETF universe. Though only 4% of ETFs are actively managed, they attracted 10% of the $902 billion of inflows ETFs saw last year.

Though equity and alternative ETFs have generated the most buzz lately, taxable-bond funds are the most popular active ETFs, both by 2021 flows and fund size. Both SPDR Blackstone Senior Loan ETF and JPMorgan Equity Premium Income ETF (JEPI) collected more than $5 billion of new dollars in 2021, more than any other active ETFs. The JPMorgan Ultra-Short Income ETF (JPST) stands as the second-largest active ETF with $18.5 billion in assets.

Despite steep losses last year, ARK Innovation had net inflows of $4.6 billion, increasing its assets under management by 26%. It ended the year as the third-largest active ETF.

  - source: Morningstar Analysts

Active ETFs’ market share is poised to increase as more options become available to investors, says Adam Sabban, a senior manager research analyst. "2021 saw a flurry of active ETF launches; 295 of these funds hit the market last year, a new record that accounted for about 62% of all ETF debuts."

Firms have also started converting their active open-end funds into ETFs. Dimensional Fund Advisors turned six of their mutual funds into ETFs last year, and Dimensional US Core Equity (DFAC) is the third-largest active ETF with $15.2 billion in assets. Firms including Franklin Templeton and J.P. Morgan have announced plans to covert more funds into ETFs this year.

"ETFs have become the preferred investment vehicle for a growing number of investors," Morningstar’s Johnson says, "and I expect that active ETFs will continue to gain market share in the years to come.

An earlier version of this article incorrectly listed the 2021 net flows of Dimensional US Core Equity 2 ETF DFAC, Dimensional US Targeted Value ETF DFAT, and Dimensional US Equity ETF DFUS. The correct 2021 net flows (in USD, billions) are 0.86, 0.47, and 0.13, respectively. An earlier version of this article incorrectly included Grayscale Bitcoin Trust (BTC) GBTC and Grayscale Ethereum Trust (ETH) ETHE as active exchanged-traded funds. They are legally designated as grantor trusts.

Katherine Lynch does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.