Active ETF and taxable fixed income SMA growth accelerates

Both SMAs and ETFs continue to steal market share from mutual funds across wirehouse platforms in 2024 through Q3. Market share for mutual funds declined to 45%, as both ETFs and SMAs continue to close the gap.

Figure 1: Market Share by Product Wrapper Wirehouse Channel

_{Source: BNY Growth Dynamics. Trend data as of September 30, 2024.}

SMAs: Taxable Fixed Income Emerges from the Shadows

Taxable fixed income SMAs accounted for 20% of wirehouse net sales, despite making up only 10% of SMA assets under management (AUM). The sharp uptick in demand suggests taxable fixed income SMAs are increasingly viewed as desirable at this point in the market cycle given in Fed policy¹.

Both intermediate core and core plus strategies realized dramatic increases in percentage of sales, alongside corporate bond ladders. Intermediate muni and large blend (custom index²) had the biggest aggregate net flows over the last year, at $13bn and $12bn respectively.

Figure 2: Wirehouse SMA Net Sales by Investment Style  

_{Source: BNY Growth Dynamics. Trend data as of September 30, 2024.}

Active ETFs: 5% of AUM but 22% of Net Sales

With strong ETF performance across all major asset classes, active ETFs collected 22% of wirehouse ETF net sales while accounting for only 5% of total ETF AUM. Taxable fixed income (30% of net sales), U.S. equity (29%) and alternatives (28%) were the leaders in active ETF flows. U.S. equity continues to grow given the strong market performance 2024 YTD, playing an increasing role as more asset managers look to chase returns in a “risk on” environment.

Industry-wide, active ETFs represented 7% of the total ETF market at the start of this year and accounted for 30% of all ETF flows in H1.³ 

Demand for Active ETFs Fueled by New Products

More than a third of 2024 active ETF net flows at wirehouses through Q3 (36% of $17b) came from products launched in the past three years.

The JP Morgan Nasdaq Equity Premium Income ETF (JEPQ), launched in March 2022, has been a significant source of the inflows. This is in part due to the use of option to generate higher yields, a low total cost, familiarity with the strategy backed by strong marketing and distribution.

Figure 3:  Recent (>2021) Active ETF Launches that saw substantial Net Flows in 2024 - Wirehouses

_{Source: BNY Growth Dynamics. Trend data as of September 30, 2024.}

Data from Pershing’s registered investment advisors (RIAs) also shows the strength of active ETFs that reached the market in 2022. They accounted for 30% of active ETF net sales, with Capital Group Growth ETF (CGGR) and Capital Group Growth Equity ETF (CGGO) near the top of the leaderboard.

Active ETFs are becoming a crucial part of portfolios, as investors look to actively manage risk while also valuing efficiency. Taxable fixed income SMAs, like active ETFs, are achieving remarkable net sales figures for what they represent in terms of total AUM. Going into 2025, the outlook for mutual funds remains unclear as the other product wrappers look set to further diminish their market share. However, there may still be opportunities for mutual funds to thrive in certain niches or through innovation.

_{¹ Source: Federal Reserve, November 2024 https://www.federalreserve.gov/monetarypolicy/files/fomcminutes20241107.pdf}

_{²Custom Index: An investment approach that allows investors to create a unique index that's designed to meet specific criteria or objectives. This includes choosing securities to exclude to create a custom index, as well as a tool to help manage tax efficiency through tax loss harvesting}

_{³Source: Morningstar, July, 2024 https://www.morningstar.com/funds/prolific-first-half-etf-flows}

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