Active funds are powering JPMorgan's ETFs past rivals. Here's why it may continue

Published Sat, Jul 8 20238:47 AM EDT

Jesse Pound @/in/jesse-pound @jesserpound

The rapid rise in interest rates and big swings in stock market leadership have renewed interest in active management, which could shake up the the exchange-traded fund space. The ETF industry has long been dominated by passive funds, which track indexes or themes and have seen prices driven to rock-bottom levels. But active funds are growing quickly and beginning to close the gap, thanks in part to a Securities and Exchange Commission rule change in 2019 that streamlined the process to launch novel strategies in an ETF wrapper and the conversion of some active mutual funds. Active ETFs have attracted $100 billion of net inflows over the past 12 months, according to a report from State Street. The growth of active ETFs could help other Wall Street firms take on the industry's dominant players. In fact, JPMorgan 's active business was so strong that it made the firm the second biggest ETF issuer by net flows in the first half, according to CFRA. The firm edged out BlackRock and State Street and trailed only Vanguard. "People really used ETF and passive index synonymously, and that's just not the case. The ETF is a technology," said Bryon Lake, global head of ETF solutions at JPMorgan Asset Management. The firm's crown jewel is the JPMorgan Equity Premium Income ETF (JEPI) , whose defensive stock holdings and derivative-driven income made it a huge hit in 2022. JEPI recently became the largest actively managed ETF on the market, at roughly $28 billion in assets. The fund it knocked off was also a JPMorgan product — the Ultra-Short Income ETF (JPST) , which also has more than $20 billion. This gives the firm the biggest active ETFs in both equity and fixed income. The rebound in growth in 2023 has left JEPI lagging the market, but the fund is still attracting strong inflows. So is its sister fund, the JPMorgan Nasdaq Equity Premium Income ETF (JEPQ) , which is performing better this year. Some smaller JPMorgan active equity funds that have brought in cash this year include JPMorgan Active Value ETF (JAVA) and the JPMorgan Active Growth ETF (JGRO) . JEPI 1Y mountain JEPI has lagged the broader market in 2023 after outperforming last year. The interest in active could be an advantage to firms like JPMorgan, which have a deep bench of fund managers from their mutual fund business. Similarly, mutual fund giant Capital Group has found success after launching its first active ETFs in 2022. To be sure, another reason that passive investing has gained popularity over the past few decades is the long-term underperformance of most active fund managers. The ability to buy broad exposure to equities at low fees has been a smarter move for investors in most cases, rather than trying to find the right stock picker. That was still the case in the first half of this year. Two-thirds of U.S.-centric active funds fell short of their relevant indexes in the first half, according to a report from Morningstar. Active funds did fare better than passive funds in many categories, like small cap growth — perhaps a more fair comparison, given that passive funds do include fees and trading costs — but underperformed significantly in the popular large-cap blend category, according to data from Morningstar Direct. However, Lake pointed to the continued large size of the mutual fund market as an example of the existing appetite for active management that ETFs can tap into. He also noted that funds like JEPI are offering investors a different way to manage their portfolios compared to pure stock index funds. "You can drive an outcome. JEPI's a great example. It drives income as the outcome. It lowers the volatility. … So people want active, and we think we're just getting started. We think active is going to continue to grow at a very fast rate," Lake said.