Benefits of Exchange-Traded Funds in Active Management – NBC10 Philadelphia
Exchange-traded funds (ETFs) have been gaining popularity as investors choose actively managed ETFs over active mutual funds. This shift is due to the cost advantages of ETFs, including lower fees and improved tax efficiency, according to experts.
From 2019 to October 2024, investors withdrew $2.2 trillion from active mutual funds while adding $603 billion to active ETFs, as reported by Morningstar data. Active ETFs have seen positive inflows annually from 2019 through 2023 and are expected to continue this trend in 2024. In contrast, active mutual funds have experienced outflows in most years, with a significant $344 billion loss in the first 10 months of 2024.
Bryan Armour, director of passive strategies research at Morningstar, views active ETFs as the “growth engine of active management.” Despite being in the early stages, active ETFs have shown promising growth amid the current market conditions.
Comparing mutual funds and ETFs, both hold investor assets but ETFs have become more appealing due to their cost benefits. Active management often comes with higher costs compared to passive investing in index funds, leading investors to prefer ETFs. In 2023, the average asset-weighted expense ratio for active funds was 0.59%, much higher than the 0.11% for index funds.
Historical data shows that active managers tend to underperform their peer index funds over the long term, even after considering fees. About 85% of large-cap active mutual funds have trailed the S&P 500 over the past decade, indicating a challenge for active management. As a result, passive funds have garnered more investor money in the last nine years, as per Morningstar data.
Despite the drawbacks of active management, investors who favor this approach, especially in niche markets, find active ETFs more cost-effective compared to active mutual funds. This is largely due to lower fees and tax efficiency, making ETFs a preferred choice for many investors.
Furthermore, the conversion of active mutual funds into ETFs has been a significant trend, with 121 funds making the switch following a 2019 SEC rule change. This conversion has helped attract new capital and stem the outflows experienced by active mutual funds. However, there are limitations for investors, such as the lack of access to active ETFs in workplace retirement plans and certain limitations on ETFs with specific investment strategies.
Overall, the rise of active ETFs indicates a notable shift in the investment landscape, offering investors a cost-effective and potentially rewarding alternative to traditional active mutual funds.
