Summary
Active management has taken exchange-traded funds by storm. Active ETFs have brought in 27% of new money invested in ETFs so far this year. Their share of US ETF assets has risen above 8%.
For ETFs, low cost remains king. Small portfolios built by high-fee stock-pickers remain niche in the ETF market. Large-cap stocks and Treasuries have the highest capacity, meaning a fund holding them should have room to manage large amounts of money without running its edge.
The distribution of excess returns by active emerging-markets funds is more palatable for investors. Unfortunately, ETFs may not be best suited for some of these lower-capacity markets.
Just 53% of active US stock mutual funds are in large-cap categories. Biggest hurdle facing active managers is cost. Active ETFs tend to charge lower fees than active mutual funds.
Market makers need a wider spread or larger dislocation to make up for these less reliable profits. Investors should be wary of those focused on small caps, emerging-markets stocks, and sector-specific strategies.
In 2021, ARK Innovation ETF ARKK managed $28 billion despite over half of the stocks in its concentrated portfolio being small or mid-caps.