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Active ETF usage is taking the world by storm, with new funds being launched every day and more investors looking toward the fund structure to build their portfolios. And we have confirmation of that from one of the largest mutual fund groups around: Capital Group.
With billions of assets in its American Funds’ suite of products, Capital Group recently began offering ETFs as an investment choice on its menu. The results have been great. So great in fact that recent comments by its CEO underscore that active ETFs could overtake passive ETFs as the preferred vehicle of choice for investors.
The Morningstar Investment Conference (MICUS) is one of the superstar events for the investment and advisory community. Speaking in a keynote event, Capital Group’s new CEO Michael C. Gitlin talked a lot about ETFs, mutual funds, and his company’s position in the space. Capital Group’s American Funds is one of the largest asset managers around with over $2.2 trillion under management. Increasingly those assets have included a hefty slog of active ETFs.
In just over a year, Capital Group’s suite of nine ETFs have managed to attract over $8.5 billion in assets. That’s about 2% of all assets in active ETFs overall. Four of the funds have over $1 billion in each. The firm has already filed to launch three more products covering the bond and income space. This includes the first ‘balanced 60/40’ active ETF.
Both a spokesperson and Gitlin highlighted the fact that Capital Group’s success in the space has come from its ability to launch products that resonate with advisors and investors when it comes to building model and core portfolios. To quote Gitlin, “We didn’t clone our American Funds as ETFs. We launched new investment services.”
As for the rise of active ETFs overall, Gitlin was very bullish on the fund type’s potential. While he expressed that mutual funds are not going away anytime soon, they will have plenty of company and that investor choice is key. Over the long haul, “active ETFs will take the majority of the shares over time, just as it (active) has in mutual funds.” According to Gitlin, as more active ETFs launch, the more investors will choose them over passive funds when building a portfolio.
Capital Group’s CEO may be right. According to a new report from Bloomberg Intelligence, actively managed funds have attracted about 30% of total net inflows into ETFs so far this year. This follows active’s record 14% of total net inflows in 2022.
Some active funds dwarf passive and mutual fund rivals. For example, the J.P. Morgan sponsored JPMorgan Equity Premium Income ETF (JEPI) and JPMorgan Ultra-Short Income ETF (JPST) have about $25 billion in assets each, while the Dimensional U.S. Core Equity ETF (DFAC) has about $19 billion. It’s easy to see why.
Active managers can and do outperform passive ones on a regular basis. The problem has always been the larger fee hurdles of active funds. So, if an active manager outperforms an index, they need to clear that fee hurdle for that outperformance to translate into investor gains. But with active ETFs, fees are much lower than active mutual funds. The average active fund now only charges 0.70%, with some as cheap as 0.25%.
Second, active ETFs can take advantage of the creation/redemption mechanism when it comes to taxes. This helps investors in the fund pay no capital gains taxes except when the asset is sold. This is a huge advantage versus mutual funds.
Finally, active management doesn’t have to look like an index. Managers can flee to cash when times are tough, buy assets on the cheap or avoid expensive stocks. In volatile and rocky markets, this could prove to be a smart play, limiting losses and exaggerating gains during upswings.
The combination makes for plenty of investor demand. and with active ETFs only making up less than 6% of the $7 trillion in total assets in the ETF market, there’s plenty of room to grow.
With Capital Group’s long history of working with advisors and being options in many workplace retirement plans, it certainly has the potential to capture much of the market. Just like it has with mutual funds. And its suite of funds happens to be quite good, featuring low costs, easy-to-understand mandates, and building block potential. So, it’s no wonder why the funds are hits.
|Name||Ticker||Type||Active?||AUM||YTD Ret (%)||Expense|
|Capital Group Growth ETF||CGGR||ETF||Yes||$1.97 billion||15.65%||0.39%|
|Capital Group Global Growth Equity ETF||CGGO||ETF||Yes||$1.5 billion||10.95%||0.41%|
|Capital Group International Focus Equity ETF||CGXU||ETF||Yes||$1.2 billion||8.93%||0.54%|
|Capital Group Core Equity ETF||CGUS||ETF||Yes||$868 million||7.98%||0.33%|
|Capital Group Dividend Value ETF||CGDV||ETF||Yes||$2.41 billion||6.96%||0.33%|
|Capital Group Core Plus Income ETF||CGCP||ETF||Yes||$754 million||1.38%||0.34%|
Active ETFs have quickly taken the investment world by storm. With their benefits and potentially better returns, more advisors and investors are using them. Capital Group’s suite is a prime example of that. With the success, CEO Gitlin’s prediction that active ETFs will overtake passive may just come true.