Fuse Blog

Active ETFs: A Product Development Conundrum

ETFs continue to gain traction, posting record AUM growth in 2020, and already setting new records in the early months of 2021. The accelerating growth of ETFs is intensifying the pressure on asset managers to formulate product development plans for ETFs, if for no other reason than to retain assets that may otherwise leak from their mutual funds. Yet as we pointed out in our April 27th blog, “despite moderate net flows (24% of total net flows) to active ETFs in 2020, active ETF assets only account for 1% of total fund AUM, through the first quarter of 2021.”

Expectations for semi-transparent (ST) ETFs, which generated a flurry of activity in 2020, have been tempered by distributors, which have been slow to bring ST ETFs onto their platforms, wanting sufficient time to evaluate these novel vehicles (albeit a stance that we anticipated). American Century launched the first ST ETFs in April 2020, and a year later there are close to 30 ST ETFs, with assets nudging towards $1.4B. Thus far, American Century ($565M) and Fidelity ($476M) have pulled in most (76%) of ST ETF assets. A growing cohort of asset managers are deliberating on introducing active transparent equity ETFs, in an effort to sidestep the cost and complexity of the ST ETF structure.

As the industry seemingly moves towards customized investment portfolios (i.e., direct indexing), some product developers wonder if there is enough runway for new active ETFs to grow to scale. Fund firms are monitoring ETF conversions closely, to assess the viability of mutual fund to ETF conversions as a way to dodge the growing hurdles to growing new funds to scale. As Vanguard’s ETF share class structure nears its expiration date in 2023, asset managers are contemplating whether it might be a viable structure (i.e., would SEC green light it for other asset managers).

Active Semi-Transparent ETFs, AUM and Product Growth ($USD, 1Q 2021)

etf conundrum