Analysis-ETF debuts set to break 2021 record as active-fund issues jump

By Suzanne McGee and Bansari Mayur Kamdar

(Reuters) - Issuance of new exchange-traded funds (ETFs) in the U.S. marketplace is on track to hit a record high in 2023, as asset managers rush to launch actively managed funds in response to rising interest rates and market volatility.

As of last week, Morningstar Direct calculated that 391 new ETFs had begun trading in 2023. That's significantly higher than the 311 that had debuted by the final week of October in 2021, the year ETF launches set a record of 475.

"We have historically observed an increase in the number of launches from our clients in the fall, as activity picks up following the summer months, and in advance of year-end," said John Hooson, managing director for ETF Product at BBH.

"We are seeing that phenomenon become a bit turbocharged in 2023, as new products are rolled out in response to current market conditions – namely, rising rates and market volatility."

The U.S. Federal Reserve had raised interest rates to multi-year peaks before pausing last month, with geopolitical shocks and fears about rates remaining higher for longer roiling markets.

Since late September, asset managers have been rolling out new products at a frenetic pace, with weekly totals double or treble the longer-term pace of eight or nine new ETFs.

Last month, ETF debuts set a monthly record of 69. So far in October, the total stands at 47, according to Morningstar Direct data. The final number for October will almost certainly be higher, analysts said.

Most of the trends that have fueled explosive ETF growth in recent years are expected to remain intact heading into 2024.

Bryan Armour, ETF analyst at Morningstar, said that much of the impetus is coming from asset management companies that have begun to develop ETFs tied to strategies that have underpinned successful mutual funds.

While some argued that the market for passive ETFs that track an index may already be saturated, there's plenty of room for new actively managed ETFs.

These appeal to investors by offering strategies until recently seen only in the mutual fund arena, providing them with greater liquidity and often significantly lower fees.

Of the 375 ETF launches so far this year, nearly 75% have been actively managed funds.

"Active funds may make up only a fraction of all ETFs in the market, but they punch well above their weight in inflows," said Wes Crill, senior investment director at DFA, one of the largest issuers of active ETFs in the market.

Active ETFs make up just 6% of the total net assets, but they've received nearly a third of the net inflows in September, according to Morningstar data.

Aniket Ullal, head of ETF data and analytics at CFRA, tied the boom in active ETFs to an explosion of interest in defined outcome ETFs, products that use options to cushion downside risk in exchange for some kind of cap on the upside.

These appeal to investors made nervous by volatile and uncertain markets, analysts said.

Assets in active ETFs had reached $22 billion as of January 2023, from only about $183 million four years earlier, according to Morningstar data.

So far this year, assets in defined-outcome ETFs have climbed still further by $2.64 billion, with 48 new launches.

These ETFs can easily be customized to meet investor preferences, said Drew Pettit, ETF analyst at Citigroup.

"The firms build one, and then modify it to have a different level of volatility or be based on a different index or some other slightly different terms," and then launch those variations, Pettit said.

In spite of the bond market being on track to deliver a third straight year of losses, asset managers are also rolling out new fixed income ETFs and investors are responding.

Of particular interest to investors are actively managed portfolios of bonds, like those introduced by Capital Group in late September.

"An active manager can be a lot more nimble and capture some of that upward momentum on interest rates or downward momentum," said Frank Koudelka, global ETF product specialist at State Street, explaining the flurry of new fixed-income offerings.

Some of these, like the just-launched JPMorgan Active Bond ETF, offer ETF investors near-replicas of existing mutual fund strategies.

So far this year, 82 new bond ETFs have made their debut, according to Morningstar Direct.

(Reporting by Bansari Mayur Kamdar and Suzanne McGee; Editing by Devika Syamnath)