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After decades of index fund dominance, investors are getting more active in trading the market
After decades of index fund dominance, investors are getting more active in trading the market

CNBC

time04-05-2025

  • Business
  • CNBC

After decades of index fund dominance, investors are getting more active in trading the market

Something unusual is happening in a market long dominated by index funds. Active management is staging a comeback. Take the action in equity ETFs two weeks ago. Amid more whipsaw action in stocks that has typified 2025 trading, there was a net outflow from equity exchange-traded funds. But in a surprise, the selling was mostly on the index fund side. There were net outflows of $1 billion from equity ETFs in all, but $3 billion in inflows to active equity ETFs to offset the $4 billion index fund withdrawals, according to ETF Action data. ETF experts say actively managed ETFs time in the spotlight marks a transformation that may reshape the ETF space for years to come. A record number of ETFs has launched this year, with 288 new funds and the potential for over 1,000 new ETFs by year-end. In total, there are now more than 2,000 active ETFs, rivaling the total number of index ETFs. While they only make up about 10% of total ETF market assets, they are now over one-third of the flows this year from investors. Through the trading week ended April 25, ETFs had taken in $363 billion in flows in 2025, with $132 billion (34%) into actively run funds. "Actively managed ETFs are taking over the marketplace," said Jon Maier, JPMorgan Asset Management Chief ETF Strategist, appearing on last week's "ETF Edge." JPMorgan offers a range of actively managed ETFs, including its popular income ETF JEPI. There are good reasons for all investors, whether index or active, to use ETFs. Buying and sell stocks offers tax efficiency, and many ETFs have relatively low expense ratios. More active ETFs are on the way, with a decision from the SEC expected that would allow companies that currently have traditional mutual funds to offer a version of all of those funds as an ETF. "There is parity between active and passive now even if the asset bases are very much different," Maier said, referring to the fact that index funds continue to hold the larger share of total assets ($231 billion in this year's flows). After decades during which active stock pickers have often been exposed as "closet indexers" in their funds, in effect buying up what the index holds more than distinguishing their portfolios from benchmarks, it is important for investors to identify funds that are taking a unique approach. Mike Akins, founding partner of ETF Action, said investors can look at a measure of correlation to the overall market — R-squared — as one way to get a sense for a fund's "active" nature. Some ETF managers are running what are "active by default" funds with a tilt, a quantitative model unique to their firm which enhances the underlying index performance, but remain closer to the index in overall composition, such as Dimensional Fund Advisors and Advantis ETFs. On the other hand, firms like JPMorgan and T. Rowe Price, from the world of active stock picking, are doing more "bottoms up" analysis of stocks and there R2 is "a little lower" as a result, Akins said. As more money shifts to active, it's critical for investors to not overreact to short-term swings in the market. Investors may have moved a lot of money earlier in April when the markets fell apart, but as of the end of this week's trading, stocks had come full circle in a trip that had seen them down as much as 13% in April. With Friday's surge capping the longest winning streak for the S&P 500 in two decades, the market had recovered all of its losses since April 2, measured by returns in both the S&P and Nasdaq. "Don't trade around when the market panics," said Bob Pisani, CNBC Senior Markets Correspondent and "ETF Edge" host. "Don't do panic trading. It's an old story, for 40 years been saying it, but it really bears repeating. Don't do anything stupid when the market is crazy." Or, in the words of Vanguard Group founder John Bogle, the index fund pioneer: "Don't do something … stand there." However investors gain market access, history says the most important trading strategy is to remain invested, and recent weeks make that point, with 5-7% down days followed by a 10% up day. "If you missed that day, got scared and sold on the 5% down day, it really impacts returns in a long term portfolio," Maier said. "Time in the market, not timing the market. Sometimes it is hard and painful, but for investors that have the wherewithal, over the long term you probably will benefit," he added. There will continue to be reasons for shifts in flows away from blanket index fund exposure as macro trends lead the institutional side of the investor base to use more active ETFs. Funds like JEPI, which provide income and downside protection, or buffer ETFs that limit the impact of stock volatility on returns while capping upside, are primarily popular with registered investment advisor firms that are buying on behalf of many clients for whom they manage investments. "RIAs are allocating clients to it," Akins said. "Everyone has agreed for a while that we have had historically high valuations, and the market needed a reset, so people took a little risk off anyway," he added. Some of that shift has occurred due to the volatility in the bond market which investors have long relied on for income, but where action in Treasury yields has made advisors and investors anxious about investing in anything but ultra-short term bonds (roughly 60% of all bond ETF flows this year). "They found a different way to allocate fixed income money to similar beta, or up and downs in the market, and capture that side of the market but in a way that can meet income needs and gain some return from the overall equities market," Akins said. The rise of the younger retail investor is also an important part of the active phenomenon. Robinhood CFO Jason Warnick said on its earnings call last week that the brokerage app saw "incredibly strong engagement across the board," through the first quarter and in April. "When the market is down, our customers tend to be net buying on the day. A few years ago, folks were worried about what will happen to the retail trader if the market softens? This quarter and the strength of April really helps to answer some of those questions." Akins says the younger generation of "YOLO" investors are really leaning into leverage and inverse ETF strategies. With $10 billion in inflows year to date, leveraged and inverse ETFs investing in a single stock like Tesla or Nvidia typify this trend. "All the evidence says this is not institutional money. Less than 5% of these ETFs are held by institutions based on 13F filings. It is being driven by retail," Akins said. "On the leverage ETF side, there are just more and more people embracing the stock market and more 'Robinhood' traders are willing to do some crazy stuff." Maier says there will be more of a gradual move into active ETFs in more traditional asset classes, such as large-cap value and growth, and international, as the ETF structure becomes that much more accepted. Akins expects any split in the market's to still lean heavy on index funds within traditional investing, with passive funds taking 80%-90% of assets overall. But the shifts of the past few years, from the risk-on single-stock funds to the new income and downside protection strategies, will grow. "We will continue to see the spicy side of the market grow more and more, leverage and inverse. Every weekend, when I sit down to review new launches, I just shake my head on the single stock side. But we will see more innovation on synthetic income and buffered strategies … a continuation of the big themes we've been seeing," he said. Disclaimer

It may be a good time for investors to look at less risky ways to stay in the stock market
It may be a good time for investors to look at less risky ways to stay in the stock market

NBC News

time17-03-2025

  • Business
  • NBC News

It may be a good time for investors to look at less risky ways to stay in the stock market

As President Trump's 'not going to bend at all' approach to tariffs raises recession risk and helped to send the market into a correction last week, investors may want to consider strategies that focus more on the downside — ways to stay invested but stay protected during major stock downswings. Alternative exchange-traded funds are an option, and they have been growing in popularity in recent years. But in many cases, retail investors have focused on non-traditional ETFs that ratchet up the risk, rather than dialing it down, Mike Akins, ETF Action founding partner, told Bob Pisani on CNBC's ' ETF Edge ' last week. He was referring to ETFs that offer leveraged and inverse exposure to some of the biggest stocks in the market, from Nvidia to Tesla, and which have been highly popular with retail traders. Meanwhile, other ETF niches within the non-traditional space, known as the buffer and covered call funds, are much more popular with institutional investors. For investors who believe market volatility will persist and think about portfolio construction for the longer-term, Goldman Sachs Asset Management's Bryon Lake said on 'ETF Edge' that looking at these protective strategies make sense. The S&P 500 dipped into correction territory on March 13, though it managed to claw back some of its losses on Friday to finish the week down over 2%, still its worst week since 2023. Lake said covered call funds, including premium income strategies, are one option for investors seeking durable returns. He became known for the JPMorgan Equity Premium Income ETF (JEPI), which launched during his tenure as J.P. Morgan Asset Management's global head of ETFs. 'You sell that call, you get the premium for that, and then you can pay that out as income. As we look at this space, that's one category that's been evergreen for investors. A lot of investors are looking for income on a consistent basis,' Lake said. Goldman has its own covered call ETFs, with options for both the S&P 500 and Nasdaq indexes. Another option that offers even more downside protection are buffer ETFs, which help investors to potentially avoid substantial losses, capping downside risk via options. Goldman says its new U.S. Large Cap Buffer 3 ETF (GBXC) protects against the first 5% to 15% of losses on the S&P 500, and also prevents further declines beyond 30%. However, it also caps gains to the upside between 5% and 7%. 'A buffer strategy is going to lower the volatility in your portfolio,' Lake said. Covered call ETFs focused on the U.S. stock market have amassed nearly $100 billion in assets under management, while buffer funds hold over $60 billion, according to ETF Action data.

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