Displaying items by tag: active management

Direct indexing has emerged as a popular strategy for investors looking to enhance tax efficiency by owning individual stocks rather than traditional ETFs or mutual funds. Its growing adoption is driven by the rise of passive investing and advancements in fractional share technology, making it more accessible to a broader range of investors.

By selectively selling underperforming stocks and replacing them with others in the index, investors can realize capital losses to offset future gains—a key advantage of this approach.

However, tax benefits are generally front-loaded, meaning that over time, opportunities for tax-loss harvesting diminish as portfolio gains accumulate. To sustain tax efficiency, investors can reinvest funds, donate appreciated stocks, or explore strategies like transitioning holdings into ETFs through in-kind transfers.

Finsum: As direct indexing expands beyond passive strategies, advisors are also exploring actively managed SMAs with built-in tax management features, offering more tailored solutions.

Active exchange-traded funds (ETFs) have become a major focus in the investment world this year, drawing significant attention from top fund companies. With over $800 billion in assets and an influx of approximately $250 billion in 2024, their growth is undeniable. 

Unlike mutual funds, active ETFs often capitalize on tax-efficient structures, such as in-kind transactions, which allow them to manage gains without triggering taxable events. Recent data indicates that only a small fraction of active ETFs distribute capital gains, making them attractive for tax-conscious investors compared to mutual funds, which tend to have higher payouts. 

Notably, many new active ETFs and clone strategies, launched alongside mutual fund versions, have kept capital gains distributions minimal. 

Finsum: This is a good sign of the trend in the regulatory environment and could pave the way for more efficient portfolio solutions.

BlackRock has created two actively managed ETFs: the BlackRock Long-Term U.S. Equity ETF (BELT) and the BlackRock High Yield ETF (BRHY), focusing on ‘high-conviction’ stocks and below-investment-grade bonds, respectively. 

This introduction responds to the growing investor interest in active ETFs, which seek to outperform market benchmarks. Managed by the same professionals who handle similar mutual funds at BlackRock, these ETFs add to the firm's expanding lineup of active products.

Despite their higher fees compared to passive index funds, active ETFs like these are gaining traction among investors willing to pay more for potential market-beating returns. BlackRock's active ETF assets in the U.S. have now reached $25 billion, highlighting a significant trend in the asset management industry.

Finsum: Its critical to consider timing when picking between active and passive ETFs and the potential sources of volatility. 

In the past few years, the bond market has experienced increased turbulence as the U.S. Federal Reserve embarked on an unprecedented tightening cycle, successfully driving down inflation from 9.1% in June 2022 to 3.4% by the close of 2023. Despite the Fed's efforts to maintain stability since July 2023, fixed-income markets remain volatile, particularly in the 10-year U.S. Treasury yield. Throughout 2023, bond yields underwent significant fluctuations, reflecting market instability despite ending the year close to where it began.

Looking forward, uncertainties persist regarding economic growth and interest-rate policies, emphasizing the need for active management within fixed income. Prioritizing high-quality investments remains crucial amid mixed economic indicators and narrowing high-yield spreads, suggesting a prudent approach to portfolio diversification. 

Furthermore, strategies involving duration positioning and sector rotation offer opportunities for active managers to capitalize on shifting market dynamics, highlighting the importance of adaptability and responsiveness in navigating bond markets.

Finsum: Fund managers can lean into historical analysis and precedent in volatility and factor selection could lead to more robust returns for active management.

Last year, assets in passive mutual funds and ETFs overtook assets in active mutual funds and ETFs. This is remarkable considering that passive funds accounted for 31% of total assets in 2015. The trend has been gaining steam since 2008 due to the strong performance of market-cap, weighted indices, and a greater preference for lower fees. 

In 2023, only 47% of active managers outperformed their passive benchmarks. Over the last decade, only 12% of active managers have survived and outperformed their benchmarks. Due to this, it’s not surprising to see that passive strategies are being adopted in separately managed and unified accounts. Currently, it accounts for 32% of assets in these accounts and is forecast to grow at a 12% rate over the next 4 years, faster than growth in ETFs and mutual funds. 

Direct indexing is a customizable, passive investing strategy. It’s designed to track a benchmark but allows for customization for tax purposes or to align investments with a client’s values. According to research, direct indexing can add between 85 and 110 basis points to a portfolio’s after-tax returns. 

Direct indexing also allows advisors to offer clients more personalization while retaining the benefits of passive investing. Already, asset managers and custodians are responding by offering direct indexing solutions at scale to advisors. 

Finsum: Passive strategies have overtaken actively managed strategies in terms of their share of assets. Direct indexing is one factor, as it is a way for advisors to retain the benefits of investing in an index with greater customization and tax efficiency