The Type Of ETF That Might Take Over Investing

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In recent weeks, The Juice has spent considerable time on ETFs (exchange-traded funds). In each of our three ETF-centric installments in May, we distinguished between passive and actively-managed ETFs. 

In today’s Juice, we dive deeper into actively-managed ETFs. Because they’re one of the fastest growing and most exciting investment vehicles in the world today. 

But first, a quick look back at what we’ve done so far this month. 

We compared three different dividend ETFs. Two that use passive approaches (as in, they mirror a stock market index) and one that’s actively-managed: 

DIVO’s (the Amplify YieldShares CWP Dividend & Option Income ETF) theme is to buy high-quality, dividend-paying stocks and write covered calls on these holdings. 

We illustrated how to find and assess an ETF’s holdings by comparing the portfolios of passive and actively-managed ETFs. 

We looked at a class of ETFs that can be passive, actively-managed or a mix of both – thematic ETFs. 

In that installment, we relayed data on the growth of the ETF industry: 

Thanks, in part, to their popularity with financial advisors, American and European ETF assets have grown 16% annually since 2016, according to Oliver Wyman, a consultant firm that keeps track of such things. 

• By 2027, ETFs will account for 24% of total assets under management. 
• Actively-managed ETFs accounted for more than 70% of new ETF launches in the U.S. over the last seven years. 

A recent PwC Global survey of ETF executives revealed that 58% of these money managers think global ETF assets under management will hit $18 trillion or more by 2026. This would mean an annual growth rate of 14.6% between June 2021 and 2026. 

One Path To A Diversified Portfolio 

While the most searched ETFs among financial advisors in Trackstar, our proprietary sentiment indicator, remain passive ETFs, professional money managers are using and/or looking to include more active ETFs in their clients’ portfolios. This bodes well for the individual, retail investor, whether you have someone else manage your money or you do it yourself. 

Little known fact: Morgan Stanley hasn’t been in the ETF business for 25 years. However, in February it got back in the game with a handful of funds under its Calvert Research arm. Now, the firm is set to expand its ETF slate, keeping its focus on ESG funds. ESG stands for Environmental, Social and Governance. 

While some critics wax tepid on the ESG focus, given the nation’s divisive political climate, Morgan Stanley appears to be doubling down not only on ESG funds, but actively-managed ETFs. And they’re not alone. ESG represents one of the biggest ETF growth areas. 

Morgan Stanley says it wants to provide choice for do-it-yourself investors and professional money managers. 

In the coming weeks, we’ll look specifically at Morgan’s ETFs – their holdings and performance. Preview: They haven’t done incredibly well. That said, this doesn’t mean they won’t outperform going forward. Plus, it’s no small thing that Morgan Stanley is back into ETFs. 

All of this said, actively-managed ETFs might deserve a place in your portfolio. Look at it this way. 

Maybe you go with the top two most searched ETFs in Trackstar – the SPDR S&P 500 ETF (SPY) and Invesco QQQ (QQQ) – to form the core of your portfolio. Makes sense as this approach gives you broad exposure to some of the stock market’s top names. Maybe you do this because you find it easier than picking individual stocks. While you might never achieve a truly diversified portfolio, many DIY investors find it easier to get close using ETFs rather than stock picking. 

So the next logical step might be to “stock pick” via an actively-managed ETF. Maybe one that invests in a broad slate of names around a theme you believe in over the long-term. A slate of names you could not easily compile purchasing them one-by-one on your own. 

Just a thought. 

The Bottom Line: In addition to looking at Morgan Stanley’s ETFs, The Juice will also use future editions of our newsletter to put other passive and actively-managed ETFs on your radar. We’ll create sample portfolios that blend ETFs with both approaches alongside your favorite long-term and speculative individual stocks. 

In terms of choice and access, there has never been a better time to be an individual investor. The rapid expansion of ETF types and styles has helped propel us into a modern day, golden age of investing.

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