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The new kid’s back in town and he’s a bully. Remember active mutual funds, those dinosaurs of yesteryear? Get ready, because here come actively managed ETFs. In 2019, there were only 350 of those guys but now that number has swelled to over 1,600. More than 400 active ETFs were launched in 2023 and another 200 through June of this year. Remarkably, actively managed ETFs gobbled up over 20% of the asset flow into ETFs by midyear.
With the number of index ETFs now exceeding that of managed ones by only about 500, Morningstar ponders whether active ETFs could catch up with their index-tracking counterparts in the next few years. BlackRock, sponsor of the prolific iShares family of index ETFs, predicts that the approximately 900 billion of assets in active ETFs could balloon to 4 trillion by 2030.
Fidelity, one of the most aggressive asset gatherers in the fund industry, is in the hunt. Prospective investors should apparently “choose ETFs built by a team of experts who can find opportunities and adapt to changing market environments.”
T.Rowe Price, long a leading provider of no load mutual funds, has become an enterprising purveyor of active ETFs. According to its website, the group’s active ETFs benefit from “exceptional managers who have weathered all market conditions and offer the potential to achieve returns that go beyond an index so you can feel confident in reaching your goals.” That these behemoths have failed to deliver on their promises after 25 years of research is apparently insufficient to mute those claims.
Heady stuff, but who’s keeping score? Get out your scorecard folks. Here’s a back-of-the-envelope analysis to see if the performance of the two groups’ active ETFs justifies such braggadocio. To do so, I compared the results of several of the two fund marketers’ active ETFs with those of their corresponding Vanguard index ETFs.
I found three matches: Fidelity Blue Chip Growth, Price Growth and Vanguard Growth; Fidelity Blue Chip Value, Price Value and Vanguard Value; and Fidelity Enhanced International, Price International Equity and Vanguard World ex U.S. Since all the target T. Rowe Price ETFs were incepted only slightly more than a year ago, we are limited to returns for one full year through August.
Growth
Contrary to expectation, the two actively managed growth funds bested Vanguard’s Growth ETF in our very short-term analysis. The figures were +35% for Fidelity Blue Chip Growth, +34% for Price Growth and 31% for the Vanguard index ETF. Nothing dire here, could be the managers or could be random blips.
Value
Just what you would expect to find. Our Vanguard Value benchmark performed equivalently to T. Rowe Price Value (+24%), dwarfing Fidelity Blue Chip Value’s +18%.
International
Here the Fidelity ETF emerged as superior at +22%. Both the Vanguard international index fund and T. Rowe Price International Equity posted returns of +18%.
Takeaways
To facilitate comparison of the results, I averaged performance across the three ETF pairs for each fund family. As anyone familiar with the decades of research supporting the efficient market hypothesis would have anticipated, the outcomes were almost identical—T. Rowe Price and Fidelity at +25% and Vanguard at +24%. Of course, whether the promise of outperformance by the sponsors of actively managed ETFs turns out to be more than bluster awaits more definitive and longer-term study.
Not incidentally, Vanguard’s three ETFs had by far the lowest average expense (.05) in relation to both the T. Rowe Price (.40) and Fidelity (.49) offerings. In light of Morningstar’s dictum that low cost is one of the most reliable predictors of investment profit, it seems unlikely that the wish of active fund providers will prevail.
Steve, perhaps one other point to make is that active ETFs are run by people who may eventually retire, leave the company or “lose their touch.”
When a stock picker is responsible for the fund’s historical returns, it cannot be assured that the performance of the fund going forward will match what investors have experienced in the past.
Of course, index ETFs don’t have this problem.
Good point, and especially for so-called “star” portfolio managers like Joel Tillingham’s departure from Fidelity Low-Priced Stock. Of course, if like portfolio managers in general, those managers who perform in the top quartile usually fail to do so five years later, it may not make any difference at all. The efficient market hypothesis doesn’t care who the fund manager is!
financial products are one of the absolute biggest rackets in life
I don’t know how people can look in the mirror and sell most of these things to unaware people….completely unethical
sticking with index funds for stuff in the market
I think about it this way. Commissions have been reduced and fund expenses have been reduced. The last outrage to go will be those $300 an hour advisory fees, as more and more people realize the emperor has no clothes.
More like the 1% AUM fees. Hourly I hear is the way to get advice if you need it.
Steve, you alway pick interesting things to write about. If active ETF’s trade more than passive ETF’s, they may generate capital gains. We may also have to consider after tax returns if held in a taxable account.
Hi Ed,
Yup, less capital gains is another big advantage of index funds held in taxable accounts!
Don’t ETFs have a way of flushing out the capital gains? I don’t recall my Vanguard ETFs doing any capital gains distributions.
That’s right, capital gains from ETFs are pretty rare, but they can happen.
I guess I’ll have to wait a little longer for that “always in the future/coming soon” better mousetrap.
In the meantime, I will stick with my low cost and passive Vanguard options.
Right on, Jimbow!
Steve,
Are the figures before or after expenses?
Hi Parkslope,
It’s like mutual fund performance is always reported—net of expenses.