Editor's note: Read the latest on how the coronavirus is rattling the markets and what investors can do to navigate it.
For longtime professional wrestling fans, everything old is new again. Last week, my hometown's favorite wrestler and former WWE superstar C.M. Punk came out of a seven-year retirement and made his return to the ring with a new wrestling company. It was déjà vu but with a twist. Investors are experiencing something similar. How so? In what seems like a throwback move, exchange-traded fund providers have been launching scads of new active strategies. That may leave some scratching their heads. After all, haven't investors continued to shun actively managed U.S. diversified stock funds in favor of index funds? Yup. But as my colleague Katherine Lynch pointed out in a recent article on fund flows in 2021's first half, some of the newfangled active approaches in the ETF space are gaining traction. Active ETFs aren't new: They first debuted in 2008. But Morningstar's global director of ETF research Ben Johnson has noted that the number of active ETFs has doubled since 2018. There are the standard flavors of active ETFs, including broadly diversified active bond ETFs from well-respected bond shops like Fidelity and Pimco and diverse active stock ETFs from the likes of T. Rowe Price--and, in early 2022, from Capital Group. There are also active thematic funds. Thematic funds--which invest in trends like clean water, cannabis, and artificial intelligence, for instance--aren't all actively run, but the group's poster child, Ark Innovation ETF ARKK, is. Does this flurry of interest around active ETFs signal a rebirth for active management overall? Probably not. Morningstar's biannual active/passive barometer research illustrates that most active managers have underperformed their passive counterparts over the long term--even in difficult markets such as 2020's, when one might expect active managers to shine. It's therefore hard to imagine that active strategies, as a group, can return to glory. Rather, the emergence of active strategies in the ETF space--particularly those from well-respected active shops like the ones mentioned above--is another salvo in the showdown between ETFs and mutual funds for investor dollars. Morningstar columnist and longtime industry observer John Rekenthaler expects ETFs to eventually overtake mutual funds as the industry standard, arguing, "ETFs offer several advantages that mutual funds cannot match, without counterbalancing drawbacks." Although mutual funds are unlikely to tap out to ETF pressure anytime soon, it is, as C.M. Punk would say, clobbering time.
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