Asset managers are adopting a "spaghetti cannon" approach to launching exchange-traded funds, flooding the market with new products in hopes of identifying the next popular investment. This strategy involves launching numerous ETFs, particularly active and thematic ones, to see which ones gain traction with investors. For example, during the first half of this year, 476 active ETFs were launched in the US and Europe, significantly outpacing the 234 passive ETFs debuted in the same period, according to Morningstar data.
This trend represents a notable shift in the ETF industry, which has historically been dominated by low-cost, index-tracking products. While passive funds still hold the vast majority of ETF assets—$13 trillion in the US and Europe compared to $1.2 trillion for active ETFs—assets in active ETFs are growing at a much faster rate, having more than doubled since the end of 2023, while passive assets rose 39%. Major financial institutions like BlackRock and JPMorgan Asset Management are increasing their active ETF offerings, and Travis Spence, global head of ETFs at JPMorgan, predicts global assets in active ETFs will quintuple to $6 trillion in the next five years.
The proliferation of new ETFs, which reached over 10,000 globally by the end of September, is partly driven by the increased investor demand for active management and specialized themes. Many of these newer ETFs, however, track niche portfolios and often come with higher fees. Research from Itzhak Ben-David and colleagues indicates that specialized ETFs frequently underperform, losing about 30% on a risk-adjusted basis over their first five years, with a significant portion of this underperformance attributed to the overvaluation of underlying stocks at launch and higher fees.
