Trends in Active ETFs

Historically, January tends to be a weak month for ETF inflows. But ETFs entered 2025 on a hot streak, taking in more than $100 billion for two consecutive months and registering record inflows for all of 2024. In fact, over the past 12 months, inflows have averaged $92 billion. And that’s the exact amount ETFs took in this January, as supportive markets helped them remain on trend. Last month’s record inflow of $92 billion was 142% greater than the average January and more than $15 billion above the past January record of $77 billion in 2018. January’s record inflows were driven by more of what drove 2024’s calendar-year records: • Increased use of low-cost (+$47 billion) and active (+$43 billion) ETFs. • Risk-on behavior across asset classes, especially in US equities where their $43 billion of inflows accounted for 90% of all equity flows. • Bond ETFs’ +$37 billion benefiting from risk-on credit overweight allocations, including a monthly record $7 billion into bank loan and CLO ETFs. • Ongoing expansion into non-traditional/alternative exposures (+$6 billion) and outcome-oriented active strategies such as defined outcome (+$1 billion) and derivative income (+$5 billion, a monthly record).

A perk of my job is that I get to speak with a wide variety of service providers - from the suits to the bankers to the technologists. One thing I’ve noticed recently: the Active ETF market is keeping everyone busier than ever. So, what is an Active ETF? At its core, it’s an exchange-traded fund that trades on exchanges with intraday liquidity and transparency. But unlike passive ETFs, Active ETFs are run by a portfolio manager (or team) who makes decisions about which securities to buy or sell. The goal is to outperform a benchmark, not just replicate it. How fast is it growing? 📈 European Active ETF AUM jumped 68% in 2024 to $55.43bn (HANetf) 📈 Active ETFs made up 88% of all U.S. ETF launches through June 2025 (iShares) 📈 37% of ETF flows this year went into active strategies (J.P. Morgan) Some providers tell me they are seeing dozens of launches per month. To understand the challenges and opportunities ahead, I jumped to the other side (the fund side) and spoke with ALTALLO member Stephen Lynch, Portfolio Manager at Investlinx Investment Management Limited. A link to the full interview can be found in the comments. In Summary, here’s what he shared, and where I see some possible opportunities for vendors to step in: 1️⃣ Distribution is one of the biggest hurdles. ETFs may be easy to list, but hard to distribute, especially since investor channels vary across Europe (DIY in Germany vs. advisor-led in Italy). 💡 Vendor opportunity: Platforms, advisory networks, and digital distributors that can localise strategies and reduce friction will stand out. 2️⃣ Data is another critical piece. Beyond selling, issuers must ensure accurate NAVs, holdings, and regulatory docs across an ever-expanding set of vendors. 💡 Vendor opportunity: Data providers and fintechs can win by automating accuracy and compliance at scale. 3️⃣ Innovation is accelerating. From buffer ETFs to catastrophe bond ETFs, the U.S. shows what’s possible. Europe is just getting started. 💡 Vendor opportunity: Structuring, pricing, trading, and analytics solutions will be in high demand to support new products. 4️⃣ Education remains the biggest gap. Many still equate ETFs with passive strategies, and “active” is blurred by terms like “smart beta.” 💡 Vendor opportunity: Media, content, and investor education platforms can close this gap and unlock adoption. #activeetfs #etf #altallo

#ETFs : A Disciplining Tool for Active Fund Managers. Active exchange-traded funds (AETFs) serve as a disciplinary tool for investors to remove underperforming portfolio managers. •AETF managers outperform both mutual fund and passive fund managers. •The BIS study finds that the higher flow-performance sensitivity of AETFs is partly driven by the ability to short-sell, as increased covered short interest increases the performance flow-sensitivity •Unlike mutual fund (MF) shares, ETF shares can be shorted, allowing #investors to bet against manager performance. This short-selling feature is a novel aspect of AETFs that enables them to act as a disciplining device. •AETFs exhibit over five times greater flow-performance sensitivity than #mutualfunds . This means that poorly performing AETFs experience larger outflows compared to similar MFs •When an underperforming manager joins an AETF, investors respond by shorting more shares of the fund. Conversely, short interest decreases when a poorly performing manager leaves or a high-performing manager joins. •Underperforming managers in an AETF structure are more likely to exit the fund management industry. This enhances the overall efficiency of the sector by allowing more high-performing managers to remain. •The stocks held within AETFs exhibit improved price informativeness, suggesting that AETFs provide a faster channel to incorporate corporate information about the underlying assets. Higher AETF ownership correlates with increased price efficiency of a stock

𝐀𝐫𝐞 𝐅𝐮𝐥𝐥𝐲 𝐓𝐫𝐚𝐧𝐬𝐩𝐚𝐫𝐞𝐧𝐭 𝐀𝐜𝐭𝐢𝐯𝐞 𝐄𝐓𝐅𝐬 𝐕𝐮𝐥𝐧𝐞𝐫𝐚𝐛𝐥𝐞 𝐭𝐨 𝐏𝐫𝐞𝐝𝐚𝐭𝐨𝐫𝐲 𝐓𝐫𝐚𝐝𝐢𝐧𝐠? As actively managed #ETFs grow in popularity, many investors assume daily full transparency is always a benefit. But when active ETFs publish their complete holdings every day, they may unintentionally open themselves up to predatory trading tactics. 𝐇𝐞𝐫𝐞’𝐬 𝐰𝐡𝐚𝐭’𝐬 𝐫𝐞𝐚𝐥𝐥𝐲 𝐡𝐚𝐩𝐩𝐞𝐧𝐢𝐧𝐠: 1. Fully transparent active ETFs, like those managed by ARK Invest, publish detailed daily holdings, including exact weights and day-to-day changes. 2. This transparency allows sophisticated traders, and quantitative firms, to anticipate and front-run ETF trades, especially in illiquid stocks. 3. Front-running happens when traders rush to buy before the ETF finishes its accumulation, pushing prices higher and forcing the ETF to pay more, harming long-term returns. 𝐀𝐜𝐚𝐝𝐞𝐦𝐢𝐜 𝐫𝐞𝐬𝐞𝐚𝐫𝐜𝐡 𝐡𝐢𝐠𝐡𝐥𝐢𝐠𝐡𝐭𝐬 𝐭𝐡𝐞𝐬𝐞 𝐝𝐲𝐧𝐚𝐦𝐢𝐜𝐬: #Madhavan (2016) shows that ETF trading can cause significant price impact, particularly in illiquid securities (Madhavan, A. “Exchange-Traded Funds, Market Structure, and the Flash Crash,” Annual Review of Financial Economics, 2016). #Petajisto (2017) demonstrates that active funds with high transparency face increased risk of front-running, leading to higher transaction costs and performance drag (Petajisto, A. “Inefficiencies in the Pricing of Exchange-Traded Funds,” Financial Analysts Journal, 2017). Real-world evidence confirms that price and volume spikes in thinly traded stocks often align suspiciously with large, transparent ETF buys, consistent with opportunistic trading. 𝐖𝐡𝐲 𝐢𝐭 𝐦𝐚𝐭𝐭𝐞𝐫𝐬: 1. Increased transaction costs from front-running can erode investor returns. 2. Volatility in ETF holdings may spike, amplifying portfolio risk. 3. Active managers might hesitate to offer transparent ETFs, limiting innovation. This vulnerability has driven the creation of semi-transparent ETF structures, such as the ‘Shielded Alpha’, designed to protect active strategies by concealing daily holdings while preserving ETF transparency and liquidity. As the #ETF landscape evolves, it’s crucial for investors to understand the trade-offs between transparency, efficiency, and protection of investment strategies. Have you considered the hidden risks of full transparency in ETFs? What safeguards do you think are necessary? Let’s discuss! Interested in protecting your active strategy? Contact Simon@bluetractorgroup.com to explore bringing your active investment strategy into the Blue Tractor Group Semi-Transparent ETF wrapper. #ActiveManagement #ShareholderWealth #Innovation #AI #MachineLearning

2024 = The Year Of The ETF • ETF assets have surpassed $10 trillion. • Net inflows are tracking for over $1 trillion, a first. • Active ETFs are nearing 10% of AUM, up from under 5% 3-years ago. • Over 700 new ETFs will have launched by year-end, with over 500 of those under the active label. • Arguably the most significant development on the product front: the arrival of spot Crypto ETFs. Net flows are nearing $40 Bn, a reflection of what happens when a “new” asset class is brought to the investing masses in an accessible, liquid, and cost-effective vehicle. • Derivatives based strategies have exploded in both product number and assets… there were almost 300 new funds that use the derivatives market to some capacity. Levered single stock funds, option writing, and structured outcomes to name a few areas. The passive investing boom has transitioned to the complexity era.

If you want to understand where asset-management M&A is heading, Goldman just handed the market a $2B clue. Goldman’s acquisition of Innovator isn’t just a bet on active ETFs. It’s a read on how investors want risk managed in a higher-rate world. Active ETFs have grown at a 47% CAGR since 2020. At that pace, it’s tough to call it short-term momentum. It’s starting to look structural. Three dynamics stand out: 1. Outcome-based products are outperforming generic exposure. Buffer, income, and structured-risk profiles align with how allocators think in volatile markets. 2. Distribution is fragmenting. Advisors want tools that feel closer to private-market customization, delivered with public-market liquidity. 3. Incumbents are buying innovation cycles. For large managers, acquisition is becoming the fastest path to product differentiation. For investment bankers, the opportunity is upstream. As investor preferences shift, asset and wealth managers will revisit product strategy, distribution, and inorganic growth quickly. 👉 Where do you see demand pulling dealmaking next: outcome ETFs, alts access, or digital distribution?