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Cerulli: Passive Overtakes Active in Mutual Funds, ETFs

Despite the faster growth in active ETFs, passive remains king for now.

A recent monthly trends market report from Cerulli Associates found passive ETFs outperformed actively managed funds, although recent flows and launches continue to favor actively managed funds.

An issue is that in a higher interest rate environment, fixed-income products can deliver income and some downside protection, mitigating one of the selling points of active funds.

In December, ETF assets increased $439 billion and, for the year, grew 24.5%, according to Cerulli. Of that growth, $128 billion was due to inflows. With mutual funds, passive fund performance offset $74.7 billion of outflows with $4.1 billion of growth. Meanwhile, passively managed ETF flows outpaced actively managed by $100 billion, though actively managed posted a higher organic growth rate of 2.9% vs. 1.6%. Mutual fund assets grew $670 billion in December through performance but also saw $70.6 billion in outflows.

“It’s a milestone we’ve reached. If you’re looking at mutual funds and ETFs, there are flows out of active mutual funds and moderate to minor flows into passive mutual funds and strong flows into both active and passive ETFs,” said Matt Apkarian, associate director, product development, with Cerulli. “However, from a dollar-amount basis, the money going into active ETFs is still small. There’s about $500 billion in active ETFs vs. over 10 times that in passive.”

On a monthly basis, $10 billion flowed into active ETFs compared with $100 billion into passive, but that balance could shift.

“Independent RIAs, still do, in many cases, believe in active management,” Apkarian said. “But they believe less in the merits of active management than large broker/dealers and wirehouses that believe more strongly in active management.”

That aligns with new survey findings released by Natixis Investment Managers showing 69% of 198 fund selectors it surveyed said active fund management would be essential to investment outperformance in 2024. The fund selectors were from private banks, wirehouses, RIAs and RIA aggregators, independent or individual wealth managers and other investment advisory firms that collectively manage $19.4 trillion in client assets. The study found 58% of respondents said actively managed funds on their platforms outperformed their benchmarks last year, and 65% expect the markets to continue favoring active management.

Many advisors see passive and active strategies as complementing each other. For equities, for example, it’s much harder to generate alpha through active management than in less liquid assets, Apkarian said.

Going forward, active launches may continue to be relatively more popular as part of the natural evolution of the ETF space. The passive side is more developed with less room for new launches, whereas active ETFs are newer, and there is less market saturation. In fact, as part of this trend, actively managed ETFs grew assets by 37% last year compared with an 8% growth rate for passive ETFs, according to a flows report from Morningstar Inc.

“Rather than viewing it just as a passive/active shift, one can also view this as a secular shift to low cost, transparent and tradable products,” said Aniket Ullal, head of  ETF Data and Analytics with CFRA Research. “In the early stages of the ETF industry, it was primarily indexed funds that were low cost, transparent and tradable, which accounted for the growing share of indexing relative to active. In the last 12 to 24 months, many active strategies are now available at a lower cost in a transparent, tradable ETF wrapper, so active seems to be re-gaining some share.  Recently the largest firms in the indexed space like Vanguard and Blackrock have been expanding their active ETF lineups.”

In addition, the general rebalancing from mutual funds to ETFs will continue to drive market activity. That will happen both with replication strategies in which fund sponsors build ETFs that mirror existing mutual funds as well as with some ETF conversions.

“An asset manager can be wrapper agnostic and give advisors the chance to choose which structure makes the most for clients,” Apkarian said. “They can push new funds as well as existing strategies they are replicating. They know they will be fairly well received.”

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