Index-Tracking ETFs Were All the Rage, Until Now
BY JACK PITCHER
The titans of the ETF industry are facing competition in the battle for new money.
BlackRock , Vanguard Group and State Street have long had a chokehold on the market for exchange-traded funds, largely through the passive index-tracking funds that helped make ETF investing popular. The newer players like JP-Morgan Chase and Dimensional Fund Advisors are focusing instead on the much smaller, actively managed funds that are seeing a boom in investor interest. Those firms have climbed to third and fourth place, respectively, on the 2023 leaderboard for inflows, according to VettaFi. Five years ago, their ETF businesses were largely nonexistent.
Despite years of predictions about the death of active investing, interest in the funds is growing: Active funds have drawn 23% of total ETF inflows this year, despite holding just 4% of the industry’s assets in January, according to Bloomberg Intelligence.
“For the first time, that group of leaders may be shaken up a little bit,” said Aniket Ullal, head of ETF data and analytics at CFRA Research. “You’re seeing players that are newer to the ETF space slowly now challenging to be in the top three or four in terms of flows. That’s a major change in the industry.” The combined market share of BlackRock, Vanguard and State Street has hovered around 75% to 80% for most of the past decade, according to CFRA.
With $ 2.5 trillion in assets under management, BlackRock is the undisputed leader in the space, yet the gap is narrowing.
JPMorgan’s funds have attracted more than $21 billion in fresh investor money this year, about half the sum of BlackRock. For years, ETFs have been gaining ground on mutual funds, with investors favoring their low fees, tax advantages and ease of trading. Analysts expect that trend to accelerate as more asset managers push active ETF offerings and compete on fees. Actively managed ETFs have an average expense ratio of 0.7%, according to Vetmostly taFi, compared with 0.16% for passive funds. JPMorgan’s asset management division has been one of the stars of 2023. A majority of its inflows have gone to two active ETFs, the JPMorgan Equity Premium Income ETF , which is known by its ticker symbol JEPI, and the
JPMorgan Nasdaq Equity Premium Income ETF , or JEPQ. The funds stray from the vanilla, index-tracking strategies typically associated with an ETF. Both invest in equities and employ options strategies to generate income. The funds pay high dividends: roughly 10.2% over the past 12 months for JEPI and 12.8% for JEPQ.
They have become popular with financial advisers seeking income options for their clients and use what is known as a covered-call strategy that tends to perform better when markets are volatile or moving sideways than when stocks are trending up. Launched in 2020, JEPI is now the world’s largest actively managed ETF, taking the title earlier this year from another active JPMorgan fund focused on Treasury bonds. Its annual fee is 0.35%. JPMorgan operates a handful of index-based ETFs but is primarily looking to build its active business, said Bryon Lake, global head of ETF solutions for the bank’s asset-management arm.
“We may have been a little late to the ETF party, but we were early to the active ETF revolution,” said Lake. He expects total ETF assets to double to $15 trillion over the next five years, with active management growing to make up 10% to 20% of the market. “That’s a tremendous market opportunity, and our focus is mainly on active ETFs going from here,” he added.
JPMorgan’s success with covered-call strategies has inspired copycats. Goldman Sachs Group filed with the Securities and Exchange Commission in June to launch two new ETFs that will resemble the JPMorgan strategy: the Goldman Sachs U.S. Equity Premium Income ETF and U.S. Tech Index Equity Premium Income ETF.
Dimensional, a manager of popular systematic mutual funds, didn’t offer its first ETF until November 2020. In less than three years, it has been among the largest active ETF managers by assets. Dimensional funds combine concepts of active and passive investing. They typically stick to self-designed diversified indexes and don’t attempt to time markets. Between mutual-fund conversions and newly launched funds, Dimensional runs 31 ETFs with about $100 billion in total assets. Its average fee is 0.25%. In July, Dimensional applied with the Securities and Exchange Commission to offer an ETF share class of its existing mutual funds.
Vanguard pioneered the ETF-as-a-share-class structure for index funds in 2001 and locked it up with a patent that expired this year. The SEC hasn’t previously approved the structure for actively managed funds. Dimensional has had conversations with the SEC about its plan and is hopeful for approval, says co-Chief Executive Gerard O’Reilly.
“It’s important for Dimensional and a big deal for the industry,” said O’Reilly. “It would enable more choice for the financial professionals we work with, and we think it can bring cost savings to the end investors.”
Newer players focus on smaller managed funds seeing a boom.
