ETF Inflows Hit $630B, Could Stabilize Manager Fees

Active ETFs reach $630 billion in assets, challenging fee trends amid a shifting landscape for ESG, thematic, and crypto ETFs.

By Max Weldon

5/16, 05:25 EDT
BlackRock, Inc.
JP Morgan Chase & Co.

Key Takeaway

  • Active ETFs see record inflows, reaching $630 billion in assets, signaling a potential end to the decline in fund manager fees.
  • Semi-transparent and nontransparent ETFs, led by major firms like JPMorgan & Co. and Blackrock Inc., could reverse fee compression trends.
  • ESG ETF liquidations hit a new high with 27 so far this year, amid declining interest and political backlash against ESG strategies.

Active ETFs Gain Momentum

Active exchange-traded funds (ETFs) have experienced a surge in popularity, with record inflows pushing assets under management to $630 billion. Although this figure represents a fraction of the $10 trillion in overall ETF assets and the $24 trillion in public mutual funds in the US, active ETFs are seen as a vital opportunity for traditional fund managers to maintain their relevance in the investment landscape. The majority of these active ETFs serve as new distribution channels for existing strategies, closely linked to active public mutual funds through conversions, clones, or new share classes. This shift primarily affects the investment "plumbing" rather than the asset managers themselves, with a few active ETFs introducing strategies specifically designed for this market segment.

The Rise of Semi-Transparent ETFs

A small but significant portion of the active ETF market, valued at less than $10 billion in assets under management, is drawing attention for its potential to revolutionize the asset management industry. These are the semi-transparent and nontransparent ETFs, which do not require daily portfolio disclosures. Despite mixed opinions and initial tepid interest, major fund managers like JPMorgan & Co., Blackrock Inc., and American Century Investments are either launching or planning to launch such products. These ETFs could challenge the prevailing trend towards lower fees by offering a more prominent role for managers and possibly reversing the long-standing movement towards fee compression.

ESG ETFs Face Headwinds

The market for Environmental, Social, and Governance (ESG) focused ETFs is encountering difficulties, with at least 27 ETFs liquidated so far this year, surpassing last year's total of 36. The introduction of new ESG ETFs has also slowed, with only two launches this year, marking the lowest rate in about five years. This downturn is attributed to declining cash flows to ESG-focused portfolios and a maturing market where most large asset managers already have a selection of ESG funds. The current political climate, particularly the Republican-led backlash against ESG investment strategies, is expected to exacerbate these challenges.

Thematic and Crypto ETFs Adjust to Market Shifts

Thematic ETFs, covering sectors like clean energy and cloud computing, have seen a decline in investor interest, with significant outflows recorded over the past two years. The changing investment landscape, characterized by a shift towards more secure, high-yield options and the strong performance of Big Tech funds, has prompted providers to close or restructure their thematic ETF offerings. Similarly, the cryptocurrency ETF market, especially in Asia, has faced setbacks with notable outflows from Hong Kong-listed spot bitcoin and ether ETFs, reflecting investor caution and the volatile nature of the cryptocurrency market.