ETF Edge - “Active management” is quickly changing along with the market 4/28/25

Episode Date: April 28, 2025

Actively managed ETFs have captured one third of flows this year. But the active fund space is quickly changing along with market volatility. We sort it all out for you.    Hosted by Simplecast, an AdsWizz company. See pcm.adswizz.com for information about our collection and use of personal data for advertising.

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I am your host, Bob Fassani, actively managed ETFs took in one-third of the flows so far this year. But the definition of what they are and how they work, it's changing pretty fast. We're going to sort all of this out. Here is my conversation with John Mayer. He is the chief ETF strategist for J.P. Morgan asset management, along with Mike Akins from ETF action. John, you're the wise man here. What are the major trends inactive we're seeing year to date? And what are the lessons investors should take from this wild month of trading in April?

It's really head spinning. First of all, Mike and I were talking earlier. There's almost parity between passive and active ETFs, 2,000 plus of each. So the actively managed ETFs are taking over the marketplace. About 10% of the assets, about 40% of the flows. And what we're seeing is that particularly in times of stress like we are seeing right now with the twists and turns with the tariff story, an active manager really can do bottoms up research, really focus on individual companies,

and can find a better outcome for investors. Because this is a very difficult market to navigate. and having a tremendous amount of resources behind you. It's really helpful. You know, Mike, this is shocking news. An active manager says that active management really does matter. This is definitely a groundbreaking piece of information here. But he does have a point here about trading in general for this month.

I want to talk to you about this. You know, the maximum drawdown for high to low on the S&P in April was like it was almost 13%. I mean, we're talking about this month. And now what are we down? One and a half percent, Mike, for the month on the S&P? And I guess what I'm trying to do is, what should investors take away from this kind of head-spinning activity? Well, I think staying, of course, is really important.

But that kind of plays into the active story that I think John and a lot of other people are talking. You know, just last week we saw, you know, net outflows into equity ETFs of almost a billion dollars. But active ETF saw almost $3 billion in inflows, where passive saw almost $4 billion in outflows. I think the story around active, especially in the traditional asset classes, so the traditional buckets, strategic allocations to the size and style boxes, to fixed income core, fixed income core enhanced, is that active management can do your tactical trading for you,

that they can change around this, you know, based on the macro environment, while letting the investors stay the course. And that's a little easier to do in an active framework than it is in a passive framework. And I think that story is playing out in the market. place. But Mike, as we and you and I have been saying this for a year now, that the old school active that you and I think of active old school, old fashioned stock picking is really a subset of active management these days. A lot of active management, like dimensional, for example, or Avantis, they're sort of active plus. They have a value, small cap overlay to them, but

It's not active in the sense that you and I understand traditional stock picking. Now, a lot of JP Morgan stuff does, absolutely does. But I just want to make that distinction with everyone. You agree with that, right? Mike, about you can slice and dice active in a lot of different ways. Active can be very, you know, can look closet indexing in active management has existed forever and still does. But I think if you break down the ETF market, most of the newer active managers, JP Morgan, T. price, John Hancock, you know, it's traditional bottom-up analysis on the portfolio.

And if you look at the R squared of the portfolio, if you look at that correlation, it's going to be a little bit lower. So I think, yes, DFA, Avantus are more quant shops that are active by default, but have very high overlap to the broad major composites. That's a very fair statement. Well, let's talk about what you guys do. You oversee the largest actively managed ETF in the world. I don't know if people know that it's the premium income E-T-F.

We call it J-E-P-E-P-I. And it seems to have scratched a real need for investors to have some downside protection at the same time and generate income. But let's not assume everybody knows what this is. How does J-P-B work and why has it been so successful? What do you own when you own J-E-P-B? Well, I think investors, for the longest time, interest rates were very low for a very long time. Investors really seeked out a high yield. And JEPI provides that between 7 and 9%.

What do you own when you own JEP? Well, you own two things with JEPI. You own the underlying holdings, which is actively managed by a management team, active management, JPMorgan, and then you own index options written on the actual portfolio. Now, those index options are written 2% out of the money, the role on a weekly basis.

And when there's increased volatility in the market, when the VIX increases, that offers the opportunity for an increased amount of income to the investor of JEPI. Conversely, you know, when the volatility declines, given that the options are written out of the money, it provides some upside in the underlying portfolio. Now, you say it's actively managed,

but essentially it's the S&P 500, right? I mean, how much deviation is there from what you're running? You're getting 60% of the volatility of the S&P 500. With an, again, you have two parts. The underlying portfolios absolutely actively managed. But with an option overlay, you are selling. You're selling S&P options. Yes, S&P index options.

You're selling most of your upside in exchange for income. But you're still offering the opportunity for some upside because they're out of the money options. What kind of income we're generating? About a 9, 10% right now. Yeah. Mike, this was one of the great successes a couple of years ago. And it did strike a chord for people who wanted to still be in the market, but generate income.

A lot of investors are getting old. older, they want income. We see a lot of copycat jeffies that are out there these days. Yeah, this has been a huge area of the market kind of falls into that diverse, bifurcated market where you have folks that are really risk off with buffer ATF's synthetic income where you're going to have a lower up and upside and downside captures and folks that are going head first into leverage inverse. But the synthetic income continues to see significant amount of inflows into this market.

And one thing I just note on the JEPI, it is a very actively managed portfolio. It has only about 40% overlap with the S&P 500 in that capacity. There are a lot of covered call strategies out there that mimic the S&P 500 in terms of their holdings. But JEPI is actively selecting those companies in the portfolio and looks very different than the S&P 500. Yeah. I want to just move on here. We're also seeing big inflows into ultra-short bond funds. your main fund JPST here, ultra short, what,

four and a half percent yield? And tell us about this, again, actively managed, short-term investment-grade corporate debt. What's in this? Yeah, it's about 55%. It has a duration of 0.75. It's a fully investment-grade portfolio as commercial paper, investment-grade bonds,

and short duration. Is there treasuries at all? There's no treasuries in the portfolio. So if you look at the 10-year Treasury has gotten from 4.9 this year to 4.2%, and this fund yields 4.5% yields worst. It provides a ballast in your portfolio stability for those investors that are looking to protect principle. And it's really the ultra-short space has been an area in the active space that has been tremendous close. Investors love it. I mean, we, 4.5%, you're effectively getting what? a 2% 1.5% real yield and take out inflation. I mean, investors, they're incredibly sticky.

Our viewers love them. They love their money market funds. It's real competition for stocks, don't you think, at this point, finally, after how many, you know, decades has people, bonds have been no competition for stock? You know, I think in the active space, fixed income is an area that's really can benefit from active management. It's a very complex market, just generally. And I think 70% of the market is actually active overall in fixed income. Putting active, using the ETF structure and using active management inside the ETF structure really is beneficial to clients, both on short term as well as intermediate as well. Yeah. I want to move on. Mike, any thoughts on short term, ultra short bond investments? Yeah, I mean, other than that, it's just, it's over almost 60% of all fixed income

flows year to date is into short term and primarily ultra short. So this category is where people are hiding out to weather the storm in terms of where they're actively allocating and increasing allocations, Ultra Short is seeing tremendous flows and is driving fixed income overall ETF flows. Good. Let me move on and talk about equities. International equities have held up a lot better this year than people thought when the investors looking to diversify away from U.S. stocks, essentially. So you, J.P. Morgan, you oversee several big ETF funds for Japan, for Canada. These are market-weighted indexes, right, of stocks in those countries. They're up in the low single digits this year. I was looking at them this morning.

They're outperforming the U.S. for the first time in years, really. I'm specifically Japan and Canada here. Yeah, we've seen flows into BBJP and BBCA. There has been an increased appetite for international investing, obviously with the environment that is currently going on right now. I do think the better way to play international right now is through active management. We have a fund called JIR, J-I-J-I-R-E, that looks at funds, it looks at companies in different sectors, and again, bottoms up research.

It doesn't veer far away from an index, but it's an actively managed approach. And if you think about international, how many international companies, does the average investor know, not many. So handing that investment process over to an active management team really makes a lot of sense. And you are seeing a huge amount of flows. And one interesting stat, there's only been two European ETFs that have been launched over the past six years.

The market's really behind on European ETFs. Yeah, but this is market weighted though. BBJP and BPC, yes, that's correct. And we showed these, look here, you here you go up well here's j iare but if you put back Canada and uh and uh and uh other ones like japan it's remarkable look at that v shape for the last month and you look at this and you can't help but you know as an investor draw some conclusions about not trading around when the market panics don't do panic trading i mean i know this is an old story we've

been talking about it since jack bogel for 40 years but it really bears repeating here don't do anything stupid when the market is crazy. I mean, what's your position on this? Well, think about it. What we've experienced over the past few weeks, we've had five and seven percent down days. A few days later, we had a 10 percent up day. So if you missed that 10 percent up day and you got scared and sold on the 5 percent down day, that really impacts your long-term returns in a portfolio. So it's not about timing the market. Again, it's about time in the market. And sometimes it's hard and sometimes it's painful. But if you have that wherewithal over the long term, you're probably

going to benefit. But isn't the point then, and I'm pulling out the stock Sherpa and you, the old wise man, is to have a plan and to stick with the plan. The studies are very clear. People tend to underperform their benchmarks because they do silly things like trying to trade themselves out of situations that are uncomfortable. Most of us know it's better to do nothing. Jack Bogle, who's the man who had the biggest influence on me, the founder of Engar, used to say, don't just do something, stand there. It's better to do nothing in a sense, but you have to kind of understand your risk profile, your risk tolerance, time horizon, how long you need to be in the market, retirement, all your goals. So I think that's really important as well. And that plays into

diversification, whether it be into fixed income, into derivative income like JEPE or JEPQ or short-term instruments like JPSD, you can build a portfolio of actively managed ETFs to cater to your risk profile and risk tolerance. Mike, it's amazing watching all of these alternative products out there to provide some kind of downside protection, these alternative ETFs that are out there. So you mentioned we've had buffer strategies on synthetic income like JEPB, leverage and inverse ETFs including leverage and inverse single-stock ETFs. options over it. Look, I have a little list here that everybody can read just to try to make sense out of all this.

But these products have not been around that long. The buffer's been around for a little while, but there seems to be a real interest in this. Is it because people are getting older? They got spooked by some of the downside we've seen in the last few years. Some people want income. What's sort of driving these, I call them alternative ETS, but I'm not sure what you would call all these together, but And it's really interesting watching them expand dramatically in the last few years. Yeah, I mean, I think you can really break it into two halves, right? So you have the younger generation of kind of YOLO, if you will, really leaning into the leverage inverse strategies. The single stock leveraged into the ETFs have seen $10 billion of inflows year-to-date.

And that's really primarily levered single-stock names. And they tend to be the most volatile single-stock names. All evidence suggests that that's not institutional money. If you look at 13F holdings, less than 5% of these things are held by institutions. So it's being driven by the retail trade. Now, the counter side of that is the buffer and synthetic income. I think if you look at the ownership of that, it's primarily driven by institutional ownership, RIAs that are allocating their clients to this.

I think two things can be played there. One is, I think everybody's agreed for a while. We've had historically high valuations. the market kind of needed a reset. And so people were a little bit risk off anyway. But then also, you've had this period of really, how do you allocate into fixed income? So a lot of folks are looking at different ways to allocate some of their fixed income bucket into something that might have similar beta construct or similar up-down captures to that side of the market,

but do it in a way where they can still meet that income need and gain some of the return structure of the overall equity market. So a lot of big macro trends on the institutional side, and I think on the leverage inverse side, it's just an idea of more and more people embracing the stock market, more and more Robin Hood type traders that are willing to do some crazy stuff. Well, what I like about these, I've had problems with leverage and inverse single stock ETFs

because I think they encourage excessive speculation. A product like Jepi, this product makes some sense to me. Here's an older investor. I want to stay in the market, but I need to generate a little more income. I'll give a little upside, which is what you do, Jeppie, for the income. This seems to be a product that makes some sense for me. If I'm an older investor, I'm smart enough to know I'm not going to pull out of, I shouldn't pull out of the market.

That's not a good idea. But I do need to have some kind of protection. And even some of these buffer ETFs, they act sort of like a collar in a way, make some sense to me. If I'm an older investor and I'm smart enough to know, don't get out of the market, but is there some way I'll pay something to provide some kind of, I'll give up a little upside protection

to provide some protection on the downside, you know, sort of collar me a little bit. These products make some sense to me. As an older fellow, I'm almost 70 years old folks, so believe me, these things make sense when you get up into my age group. Lower volatility in the market, consistent income,

during periods of volatility like now, increased income, and potential upside on the underlying portfolio as well, not completely selling the upside. I think that's important. Any thoughts on, and I know you're not the ETF, you know, Sherpa here, but you're the strategist. What's going to become popular the rest of this year? Bitcoin ETFs were the biggest thing last year. They've kind of quieted down this year. We see other active kind of products coming in to fill a need.

Do you have any sense of where demand is going to be for the rest of the year? So, you know, I talked about earlier that we're pretty much a parity between active and passive ETFs. Obviously, the asset base is much different. And what I'm seeing is that there's a gradual move towards the more traditional asset classes, like large-cap growth and large-cap value and international. And as the ETF structure, it just becomes that much more accepted, because there's so many things you can do inside the ETF in terms of both from a portfolio manager standpoint, as well as the individual investor.

I see over time, and particularly potentially with the ETF share class coming to market, potentially this year, a movement towards those more traditional asset class because it's just a better structure. Yeah, it makes a lot of sense. And as Mike and I have pointed out, Mike writes about this regularly,

the overall flows still are passive plain vanilla. The largest flows still are in that passive plain vanilla space still. Yeah, but the flows this year, approximately 40% of the flows have been active, despite that only 10% of the assets are active. Smoking like an active manager here, Mike, we keep getting the same story all the time. Mike, any quick thoughts here on where we might going for the rest of the year? Yeah, I would expect to continue to see at myfricated market where you have to, the traditional space is going to keep taking 80, 90% of your assets.

And John lays out a good story for why you're seeing more and more active share. in strategic allocations. But if you look at from there, you're gonna continue to see kind of the spicy side of the market grow. I think we'll see more and more leverage inverse. Every weekend when I sit down to review all of the new launches, I just shake my head

on the leverage inverse single stock side. But then also I think you'll see more and more innovation on the synthetic income, the buffer ETF strategies that provide kind of an equity light version of the marketplace. So that's that I don't see anything big like crypto like we saw last year, but I just think a continuation of some themes that we saw start last year Now it's time to round out the conversation with some analysis and perspective to help you better understand ETFs this is the Markets 102 portion of the podcast Mike Gakins of ETF action continues with us now

Mike we talk with John about all the Strong inflows we've been seeing into active management this year including some of his funds JEPB continuing to do strong to do well Tell me about this kind of crazy month of April and what the flows look like in and out because there's some very broad lessons here about trend following and what to do and not to do when the markets have the kind of crazy volatility that we've seen in April. Yeah, I mean, flows continue to be, as you've noted multiple times, very strong across the ETF market.

I don't think we're quite on record pace anymore, but it likely will be over a trillion dollars in flows. But as you note, you really can break the ETF market into strategic allocations. Think Vanguard, follow the market, own the market allocations versus tactical. And the flows have stayed strong and steady, which is great to see in those strategic buckets. The tactical buckets have been all over the place. Big inflows, our big outflow is out of crypto. Now last week we saw big inflows back into it, right?

So people missed that V-shaped recovery in that market. We see the same thing in sector and industries. been big outflows out of technology when the market was crashing and then we had the big D-shaped recovery. So the evidence continues to support that the long-term flows into strategic is doing well, whereas the tactical hot money, if you will, into the more niche strategies, while they're big areas of the market, the evidence doesn't suggest they're great at entering and exiting their positions. So this is exactly what Jack Bogle. was unhappy about 20 years ago when he started railing against the

ETFs he was very much in favor of people owning low-cost index funds which he helped pioneer at Vanguard but came out very public and said I am concerned that people are going to start trading day trading ETFs and to a certain extent this is what's happened he was right ETFs are being used for tactical trading not not all of it of course but spy has enormous liquidity on on big up and days and people clearly are day trading ETFs and as Bogle predicted people would be just as bad at picking bottoms and tops trading ETFs as they were picking stocks individual stocks 25 years ago I guess the lesson here Mike is

people do the same dumb things with ETFs if they're tactically trading or day trading that they would do with with stocks and have been doing historically they don't buy low sell high they buy high sell low absolutely I mean I think There are evidentially, there's plenty of great use cases for these big tactical strategies. The sector spider ETFs are fabulous tools to tactically over underweight or, you know, use risk management within your portfolio. But the narrower and narrower you get, if you're using it strategically, like you believe in a long-term theme like cybersecurity, I think that's a great trade to put onto your portfolio. But it's not a trade to be tactically done.

You own it because you believe it's a long-term opportunity to get access to. to that space. We're doing a big in-depth analysis of market timing using unrealized, realized gains of the ETF market. We don't have it complete done, completely done yet. But if you look at the fast money in and out of the more niche spaces, the evidence is clearly just showing it doesn't pay to be tactical in those volatile spaces,

at least in terms of ETF flows. Right. So we haven't, there is no special insight. insight that anybody trading ETFs has against somebody buying and selling individual stocks. So we know that. With that said, are there any heartening trends that you see? For me, I still see the majority of the money going into plain vanilla, boring, passive index funds, by and large. There's a significant amount of money that's also going into active to a certain extent.

But going into, let's talk about fixed income, it makes perfect sense. for people to pile into short-term, ultra-short bond funds when they're paying four and a half percent. And a 10 year is paying almost the same amount of money. You could explain this to your mother. Why would you give anybody four and a half percent for 10 years when you can get four and a half percent for a few months? It seems very risky to make projections about where inflation is going to be for the next 10 years when you can get a positive real yield an ultra-short fund. It does not make perfect sense to me.

I don't think people are acting irrationally there. No, I don't think so at all. I mean, I think the idea of trying to tactically play the yield curve right now is very difficult. Now, I do think that longer duration in terms of diversification, if we were to go into a recession like many are predicting, the odds are interest rates will come down and that long term will provide a better offset to that equity portfolio. But, yeah, I agree. The ultra-short, it's hard to argue against four and a half percent. basically zero risk portfolio in a market like this is when you're allocating that fixed income bucket. Yeah. We've had some modest inflows into gold. Bitcoin's been all over the place. It was the big

success last year. We had $100 billion in Bitcoin ETFs. I don't know if that's the most successful ETF product launch of all time. If it's not that, it's number two. And yet that's gone quiet. We don't even talk about those kinds of flows anymore. Anything sort of stick out to you? there? Last week is the first week in months that crypto popped on our radar again in terms of people jumping back in. I'm not, as you know, my kind of view on that space. I don't follow it from a macro perspective. But when I see the flows, it obviously jumped out. Cryptocurrency was the highest inflow asset class last week with almost $3 billion in inflows. So there's clearly some, you know, appetite there. I think a big part of that, if I listen to,

the commentators would be the idea that there's a breakdown of correlations. I don't buy that, but that we did see that flow data support that last week. But more I think what we see, which I think is fascinating, is on the single stock ETF. Last week there was 13 new ETFs that launched. Ten of them were single stock ETFs. You know, year to date, you're over 75 single stock ETFs that come to the market. and it's predominantly 2x leverage. And I don't know where this trend is going,

but I know that it seems like we're going to have a single-stock levered product for every S&P 500 company within next three-five years. Well, hold on. Several failed before. We had a Pfizer leverage product didn't go anywhere, right? There wasn't any demand for that. It seems like you have to have a certain beta to make it worthwhile, number one. Number two, there's an obvious thing that makes this work, 95 basis points charge on the thing, Right? Because you have people here who own it, I mean, for a few days, I'd be shocked to find out there are people who holdings for months on end.

There probably are who don't know what they're doing. But these are tactical. There's 30% turnover on these things almost on a daily basis. So they're agnostic on the fees. That's what's remarkable about it. It's a license to print money almost, isn't it? You're charging 95 basis points for a product where people don't care. that they're getting charged 95 basis points for it because they're turning it over very, very quickly.

I mean, that's a brilliant idea. Hell, I would launch a bunch of high beta individuals stock ETFs on that basis. I mean, you hit the nail on the head. I mean, from an investor's perspective, it actually, in a lot of cases, it's probably cheaper than them doing it themselves, right? Because they would have to, if they, one, most of them wouldn't get approved to do it in their brokerage accounts, then you have margin calls and everything else. but two, the cost to carry would be very difficult for them.

So the efficiency of it is there, and I don't fault anybody for providing products. I think of the ETF market as a tool set, and your outcome is going to be how good you are using those tools, and different tools require different skill sets. Yeah, that's a good point. All right, Mike, thanks for your help. Always appreciate it. That does it for ETF Edge, the podcast. Thanks for listening.

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