“Asset Managers Capitalize on ETF Demand with Active Funds and Conversions”

Established asset managers, who initially hesitated to embrace the ETF trend, are now entering the market by launching new ETFs and converting existing mutual funds into ETFs. Notable firms like Goldman Sachs, Calamos Investment Management, and Morgan Stanley have taken steps in this direction, reflecting the growing demand for ETFs due to their cost-effectiveness and liquidity compared to traditional mutual funds.

This year, around 75% of the 376 new ETFs launched are actively managed, a notable increase from 63% the previous year and 36% in 2019 when U.S. regulators first introduced them. Lower fees, strong liquidity, and transparency have attracted investors to ETFs, causing U.S. ETF assets to double to $7.4 trillion, representing nearly 30% of all assets managed by U.S. firms in mutual funds or ETFs. In contrast, mutual fund assets have seen a 14% decline to $15.3 trillion.

As traditional asset managers built their reputations on mutual funds, they are now transitioning to incorporate ETFs. The surge in active ETFs, while representing only 6% of the market, has experienced asset growth of 23% this year, far outpacing traditional passive index ETFs, which saw asset growth of only 4.5% in the same period.

Many established asset management firms have recognized their stock-picking expertise as a competitive edge and are moving in this direction. Calamos Investment Management, for instance, launched an active ETF last week to leverage its expertise in “convertible bonds.” Additionally, converting existing mutual funds into ETFs offers a way for traditional managers to catch up while retaining star managers.

Assets held in converted ETFs have reached $78 billion, compared to $40 billion at the end of 2022. Morgan Stanley is the latest to join the conversion trend, planning to transform its Core Plus Fixed Income Portfolio and Short Duration Municipal Income Portfolio, both with approximately $750 million in assets, into ETFs. Morgan Stanley did not respond to calls seeking comment.