It's been full steam ahead for active ETFs, with total assets now rapidly approaching the $1 trillion milestone. The ETF market, once dominated by passive indexed strategies, has undergone a seismic shift, as issuers tap into investor demand for flexible and transparent tailor-made strategies.
Since 2020, 85% of all ETF launches have been in the active space. And despite only making up 9% of total ETF assets, they’ve claimed roughly 27% of this year’s flows. This comes amid a torrent of money pouring out from mutual funds, now headed for a third straight year of outflows.
As active ETFs close in on this historic threshold, the industry has witnessed the rise of increasingly innovative entrants. These new players are deploying creative, niche-focused strategies to capitalize on areas where active management provides a competitive edge. They're accomplishing this through meticulous security selection and strategic allocation in sectors spanning energy, transportation, real estate and fixed income.
Two standout newcomers to the ETF market illustrate this trend: TCW Group and Cohen & Steers. Both issuers bring unique approaches to the active ETF phenomenon.
Tackling Active From All Angles: Riding the Megatrends
TCW’s foray into the ETF space began with its acquisition of Engine No. 1’s ETF business in 2023. (Engine No. 1 is the impact-focused hedge fund that successfully faced off with ExxonMobil in 2021 in an ESG-charged battle for board seats.)
That roster of ETFs included the Transform Supply Chain ETF (SUPP) and the Transform Climate ETF (NETZ) – now called the TCW Transform Systems ETF (PWRD). The latter invests in names set to benefit from the ongoing energy transformation. The $343 million fund targets transformative sectors, such as smart energy grids, clean transportation and digital infrastructure. Top holdings include GE Aerospace, Airbus, Trane Technologies, and Union Pacific.
Meanwhile, SUPP is focused on supply chain reshoring efforts, as companies repatriate jobs and other operations back to North America. The fund is heavily concentrated in technology, manufacturing, and transportation. It counts Waste Connections, Martin Marietta Materials, Eaton, and Vulcan Materials among its top holdings.
Converted from a mutual fund, the TCW Compounders ETF (GRW) is all about defensive growth. It focuses on high-quality firms with strong free cash flow and consistent earnings. GRW aims to capture steady growth by prioritizing companies with proven track records of compounding returns. The $132 million ETF currently has 24 holdings, including Constellation Software, Visa, and Microsoft.
Real Estate, Enhanced Income & Preferred Securities
Cohen & Steers is yet another fresh face in the ETF space. It just rolled out a new suite of targeted ETFs last month, but it takes a very different approach to active ETFs. Having been a pioneer in real estate, the company has leveraged its expertise to offer the Cohen & Steers Real Estate Active ETF (CSRE). The fund uses a bottom-up investing approach to fine-tune real estate exposure. The aim is to enhance absolute and risk-adjusted return in a relatively inefficient sector that typically exhibits a wide dispersion of returns.
Beyond equities, the Cohen & Steers Preferred & Income Opportunities Active ETF (CSPF) seeks to provide high income and capital appreciation. It invests in a wide variety of preferred securities, with a primary focus on investment grade. The ETF targets preferred securities, a type of hybrid investment believed to be undervalued relative to overall credit quality. In particular, this fund may appeal to income-seeking investors targeting stable returns from preferred shares — bond-like stability with greater equitylike upside potential.
Evolution of Active: Bright Future Ahead
As demand and adoption grow, active ETFs will no doubt continue to drive the evolution of the broader ETF market, offering new ways for investors to engage with markets and seize opportunities. The continued adoption of model portfolios has also allowed asset managers to tap into the enduring synergy between both active and passive ETFs.
Next week, I will be sitting down with Eli Horton from TCW Group and Brian Cordes from Cohen & Steers to dig deeper into these themes and new products at VettaFi’s upcoming Exchange conference in Las Vegas.
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