Active ETFs Shine During Volatile Market Cycles
Investors tend to associate the recent dramatic escalation in exchange-traded fund AUM with passively managed strategies. While these index-tracking products represent the bulk of the over $6 trillion in ETF assets, an influx of new actively managed products has materialized from issuers that haven’t historically offered their strategies in the ETF wrapper. Such offerings may be particularly attractive during volatile periods, given their ability to adapt to changing market environments by leveraging bottom-up security research to uncover emerging value opportunities.
Continued Growth in Assets with New Entrants
Actively managed ETFs have brought in about $51 billion in net flows year-to-date, representing roughly 15% of the total ETF inflows of $355 billion1 this year. This is notable considering active products in this space currently comprise just 5% of all ETF assets. Furthermore, with new active entrants in this space, the industry is becoming less top-heavy and more competitive across a wider range of asset classes. Thus far in 2022, 38 new issuers are offering active products, bringing the total number of managers to 188.2 Total active ETF assets have almost tripled in the past three years – with the trend anticipated to continue.
Innovation Drives Growth
A key driver of new asset growth in the active ETF space in recent months has been a flurry of conversions from mutual funds. In total, over $50B in assets have converted from mutual funds to ETFs since the first occurred in 2021. While many managers can be considered “wrapper agnostic,” converting an existing strategy to an ETF can be viewed as a means to jump-start flows. Also, with innovation of the semi-transparent structure – without the required daily actual portfolio holdings disclosure – active managers are less concerned about the risk of front-running3 and more comfortable with this wrapper. As a result, we’ve witnessed about 50 active semi-transparent ETF products come to market.
Intraday Trading, Cost-Effective Structures, Tax Efficiency, and of Course – Performance
The ETF wrapper enables active asset managers to offer their clients multiple benefits – intraday trading without minimum investment requirements, superior cost-effectiveness relative to other vehicle types, and improved tax efficiency with potentially reduced year-end capital gains distributions.
While these benefits are certainly attractive to investors, actively managed versions are ultimately judged on benchmark-relative performance. Actively managed ETFs that fall in the Morningstar US Large Blend category have outperformed the S&P 500® Index by an average of 160 basis points YTD (as of September 30, 2022). The outperformance is even more pronounced for actively managed ETFs in the US Large Value category, delivering an average YTD excess return over the Russell 1000® Value Index of an impressive 340 basis points, according to Morningstar.
Amid elevated market volatility, active managers are uniquely able to leverage their internal research expertise to opportunistically select only those securities with the most attractive risk/reward profiles. As passive products cannot quickly pivot to more defensive names to limit losses amid strained equity markets, they may suffer more pronounced losses than their active counterparts.
… Not to Mention Diversification
Thanks to recent market industry enthusiasm for the mega-cap technology sector, indexes such as the S&P 500® are heavily overweight names like Apple, Microsoft, Alphabet and Amazon – leading to diminished portfolio diversification. While most actively managed ETFs take a more concentrated security selection approach than an index, managers can adjust individual holdings to control sector risk. Sophisticated factor analysis tools enable managers to further limit concentration risk to help ensure portfolios are not overly exposed to any given factor (growth, value, size, quality, momentum, etc.).
During periods of market turbulence, investors are reminded of the potential benefits of including actively managed ETFs in their portfolios. When security valuations become disjointed, as we’ve seen in 2022, investors have more choices than ever to help manage risk and position their portfolios for long-term outperformance.
Natixis Active ETFs
Find out how actively managed ETF strategies can help investors pursue growth opportunities and manage risk in all market environments.
- Natixis Loomis Sayles Short Duration Income ETF (LSST)
- Natixis Vaughan Nelson Select ETF (VNSE)*
- Natixis Vaughan Nelson Mid Cap ETF (VNMC)*
- Natixis U.S. Equity Opportunities ETF (EQOP)*
* This ETF is different from traditional ETFs – traditional ETFs tell the public what assets they hold each day; this ETF will not. This may create additional risks. For example, since this ETF provides less information to traders, they may charge you more money to trade this ETF’s shares. Also, the price you pay to buy or sell ETF shares on an exchange may not match the value of the ETF’s portfolio. These risks may be even greater in bad or uncertain markets. See the ETF prospectus for more information.
Visit our ETF homepage or contact your Natixis sales representative:
2 NYSE, FactSet as of 9/9/2022
3 Front-running is trading stock or any other financial asset by a broker who has knowledge of a future transaction that is about to affect its price substantially.
Exchange-traded funds (ETFs) trade like stocks, are subject to investment risk, and will fluctuate in market value. Unlike mutual funds, ETF shares are bought and sold at market price, which may be higher or lower than the ETF's net asset value. Transactions in shares of ETFs will result in brokerage commissions, which will reduce returns. Active ETF: Unlike typical exchange-traded funds, there are no indexes that an active ETF attempts to track or replicate. Thus, the ability of an active ETF to achieve its objectives will depend on the effectiveness of the portfolio manager. Transactions in shares of ETFs will result in brokerage commissions, which will reduce returns. Active Semi-Transparent ETF Risk: Unlike traditional ETFs that provide daily disclosure of their portfolio holdings, active semi-transparent ETFs do not disclose the daily holdings of the Actual Portfolio. Instead, these Funds disclose a Proxy Portfolio that is designed to reflect the economic exposure and risk characteristics of the Fund’s Actual Portfolio on any given trading day. Although the Proxy Portfolio and Proxy Portfolio Disclosures are intended to provide Authorized Participants and other market participants with enough information to allow them to engage in effective arbitrage transactions that will keep the market price of the Fund’s shares trading at or close to the underlying NAV per share of the Fund, while at the same time enabling them to establish cost-effective hedging strategies to reduce risk, there is a risk that market prices will vary significantly from the underlying NAV of the Fund.
ALPS Distributors, Inc. is the distributor for the Natixis Loomis Sayles Short Duration Income ETF, the Natixis Vaughan Nelson Mid Cap ETF, the Natixis Vaughan Nelson Select ETF, and the Natixis US Equity Opportunities ETF. Natixis Distribution, LLC is a marketing agent. ALPS Distributors, Inc. is not affiliated with Natixis Distribution, LLC.
The S&P 500® Index is a widely recognized measure of US stock market performance. It is an unmanaged index of 500 common stocks chosen for market size, liquidity, and industry group representation, among other factors. It also measures the performance of the large-cap segment of the US equities market. The Russell 1000® Value Index is an unmanaged index that measures the performance of the large-cap value segment of the US equity universe. It includes those Russell 1000® companies with lower price-to-book ratios and lower expected growth values. You may not invest directly in an index.
All investing involves risk, including the risk of loss. Investment risk exists with equity, fixed income, and alternative investments. There is no assurance that any investment will meet its performance objectives or that losses will be avoided. Diversification does not protect against loss.
This material is provided for informational purposes only and should not be construed as investment advice. The views and opinions expressed above may change based on market and other conditions. There can be no assurance that developments will transpire as forecasted.