Morningstar - Q3 2024 - 6

Dispatches
Active ETFs Are Just
Getting Started
Despite drawbacks,
investors will benefit.
Phillips Curve
8
Active's Last Stand?
Ivory Towers
9 Is the Stock Market Too Concentrated?
Advisor Insights
11
Talking ESG
Sustainability Matters
12 SEC Makes Two Major Changes
to Climate Rule
14
18
21
Global Briefs
Americas
Greater Europe
Asia
LETTER FROM THE BOARD
Ben Johnson
The first US-listed exchange-traded fund,
SPDR S&P 500 ETF Trust (better known to many
as SPY-its ticker symbol) began trading on
the American Stock Exchange on Jan. 22, 1993.
It has proved to be a seminal moment in
the evolution of the way investors around the
world access global capital markets.
Three-plus decades removed from the dawn
of the ETF era, ETFs have become more investors'
preferred investment wrapper, and many
signs point toward the trend continuing. Most
recently, as we detail in " Active ETFs Riding
High, " Page 23, this has manifested in abovenormal
growth of actively managed ETFs. From
their humble beginnings in the runup to
the global financial crisis, US-listed active ETFs
have grown by leaps and bounds in terms
of both their number and the amount of investors'
hard-earned money they're putting to work
in markets.
Since Bear Stearns Current Yield, the first-ever
(and now defunct) active ETF, launched in
the US in March 2008, the number of active ETFs
has mushroomed to 1,526 through the end of
June 2024. Those funds held a combined
$688.9 billion of investors' assets, accounting for
7.8% of the $8.8 trillion invested in US ETFs.
I expect that active ETFs will continue to grow,
to the benefit of countless investors.
The Benefits of the ETF Wrapper
ETFs have a number of advantages for investors,
but the biggest is that, all else equal, they
tend to have lower fees than traditional open-end
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Morningstar Q3 2024
While many tout ETFs' tradability as an advantage,
I think being able to trade them all day
every day is overrated. That said, I believe that
other features of the exchange-traded package
are underappreciated. Specifically, since
ETFs trade on an exchange like stocks, any investor
with a brokerage account can invest in an
ETF in an amount as low as the price of a single
share. Many mutual funds aren't available
across different investment platforms and have
substantially higher minimum investment
requirements. Furthermore, most active ETFs that
seek to replicate the strategies plied by their
predecessor mutual funds charge fees that are
on par with or below those levied by the
institutional share classes of the mutual funds.
In this regard, ETFs are a democratizing
force. They offer broader, easier access to a larger
number of smaller investors at a price that
often matches what asset managers charge their
biggest clients.
For taxable investors (most notably those in the
US), ETFs' single biggest advantage over
mutual funds is tax efficiency. The way that money
typically comes and goes from mutual fund
and ETF portfolios is different, as is the way that
their portfolio managers initiate and close
positions. These differences are the source of
ETFs' tax advantage over mutual funds.
Mutual funds deal in cash. When investors
buy a mutual fund, they hand cash over to
portfolio managers who then put it to work in the
market. When investors sell mutual fund shares,
portfolio managers will often have to sell
securities to come up with the cash to facilitate
their redemption requests. This cash-in/
cash-out proposition can be costly, resulting
mutual funds. Most ETFs' fees are stripped down
to the cost of manufacturing the portfolio
(the management fee). Other line-item expenses
that investors might incur investing in mutual
funds-those that go toward paying for advice,
marketing, distribution, and shareholder
recordkeeping-are typically either absent from
shareholders' bills or are much lower when they
pay to invest in an ETF. Costs matter. Every
penny not spent on fees is a penny that investors
can save, invest, and compound over time.
https://www.morningstar.com/etfs/arcx/spy/quote
Morningstar - Q3 2024

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