Passive index ETFs like the SPDR S&P 500 ETF Trust (SPY (NYSE:SPY)) may still account for some of the largest, most liquid, and notable ETFs on the market, but actively managed ETFs are getting their day in the limelight too. Thanks to the 2022 bear market, numerous actively managed ETFs have earned some time in the spotlight, especially those from the derivative income and short-duration categories.
While the latest results from the SPIVA Scorecard by S&P Dow Jones Indices still show passive indexing beating active management over long periods of time, there may still be compelling reasons for investors to go active. Hedging, income, or capital preservations are all valid reasons why some investors may entrust their capital to an actively managed ETF.
Overall, there's also been a substantial increase in the adoption of active ETFs. Registered Investment Advisors (RIAs), self-directed investors, and institutional investors are increasingly using active ETFs in their portfolios, a theme accelerated by notable legacy asset managers like Dimensional Fund Advisors bringing an increased number of time-tested active management strategies to the world of ETFs.
For example, Trackinsight's 2023 Global ETF Survey found that in the Americas, 80% of respondents stated they would be more inclined to invest in an active strategy if packaged as an ETF rather than a mutual fund. In the Americas, 60% of respondents preferred ETFs for active investing as a replacement for mutual funds, which may spur more asset managers to convert more mutual funds to ETFs.
"Actively managed ETF launches appear on track to outpace passive funds again in 2023, which would represent a fourth consecutive year, and cash flow into active ETFs is close to record levels, with nearly a quarter going into active ETFs through the end of June," says Douglas Yones, Head of Exchange Traded Products at the NYSE. "Supporting this growth, the NYSE has remained a steadfast resource for issuers and investors in many ways, including dedicated educational content on ETF Central.”
Here's a look at the top three most popular actively managed ETFs in terms of assets under management (AUM) as of June 22nd, 2023 based on the ETF Central Screener.
JPMorgan (NYSE:JPM) Equity Premium Income ETF (JEPI)
JEPI topped the list, having attracted over $26 billion in AUM since its debut in May 2020. After a stellar 2022 that only saw the ETF lose -3.54%, investors continue to flock to JEPI owing to a high 30-day SEC yield of 8.48% (previously in the double-digits) and monthly distributions.
JEPI combines active stock selection with a derivative income strategy. First, the ETF actively selects and manages a portfolio of stocks from the S&P 500 for favorable valuations and risk-adjusted characteristics among others. Then, the ETF employs exchange-linked notes, or ELNS to provide exposure to an out-of-the-money covered call strategy.
The overall objective of JEPI is twofold: provide a higher-than-average yield paid monthly while targeting a lower volatility relative to the S&P 500 index. So far, it has achieved both of these goals, all the while sporting a very competitive 0.35% expense ratio.
JPMorgan Ultra-Short Income ETF (JPST)
One of the biggest losers throughout 2022 were long and intermediate duration bond ETFs. As interest rates rose at an aggressive, sustained pace, these ETFs suffered historically outsized drawdowns, nullifying their role as diversifiers and ballast in many investor portfolios.
The exception to this were short-duration bond ETFs, which were markedly less sensitive to rate hikes. A great example was JPST, which currently sits at $24 billion in AUM. This ETF primarily holds short-term, investment grade fixed- and floating-rate corporate bonds, while actively managing risk in the form of its credit quality and duration exposure.
By doing so, JPST manages to target a net yield-to-maturity 0f 5.53% as of June 22nd, 2023, while only possessing a duration of 0.76 years. Thanks to the current inverted yield curve, this ETF is paying out higher yields than longer duration ETFs with similar credit quality. JPST charges a 0.18% expense ratio.
Dimensional U.S. Core Equity 2 ETF (DFAC)
Known for their factor investing expertise, Dimensional Fund Advisors has long since managed a stellar lineup of mutual funds that for the most part was restricted to financial advisors. This changed in recent years as the firm launched more and more ETF counterparts, with a very popular one being DFAC.
With just over $26 billion in AUM, DFAC is one of the most popular actively managed factor ETFs on the market. This ETF is benchmarked to the Russell 3000 Index, while providing exposure to three factors: size, value, and profitability. Therefore, DFAC's portfolio skews towards stocks with smaller market cap, lower price to book, and higher profitability metrics. The ETF charges a 0.17% expense ratio.
Unfortunately, DFAC has underperformed its Russell 3000 Index benchmark since its inception in October 2007, returning 8.12% versus 8.55%. This points to a risk that all actively managed ETFs possess – the risk of underperforming an index benchmark after higher fees are factored in.
This content was originally published by our partners at ETF Central.