Actively managed exchange-traded funds (ETFs) have seen significant growth in the number of products offered and assets under management over the past year and continue to gain popularity as an investment vehicle, according to a paper released by investment services provider SEI.

Proponents of ETFs consider the vehicle to be superior to mutual funds due to low costs, ease of purchase, potential tax efficiency, tradability, increased transparency and liquidity. However, it would be a mistake to pigeonhole ETFs solely as index trackers. As the SEI report notes, that does not provide a full picture of the potential opportunity for actively managed portfolios.

The paper, Active ETFs: Revisited, notes that the active ETF market has grown by nearly 30 products and more than $2.5 billion assets under management in the past 12 months.

This upward trend further demonstrates the attractiveness of active ETFs to both financial advisors and investors due to their lower costs, increased transparency and liquidity, and potential tax efficiency when compared to mutual funds.

In addition to this more recent growth, the paper shows this development has been taking shape for the past six years. Since 2008, active ETF assets have comprised 7 percent of all ETF assets under management in the US.  Additionally, with more than 50 active ETFs either in registration or, if already approved, waiting to come to market, there is no noticeable slowdown in this expansion.

Despite this growth, which has been accelerated in the past few years by an SEC statement allowing active ETFs to utilise derivatives, a number of challenges remain for investment managers when launching these funds. The paper notes that chief among these is the need for further education and improved marketing of these relatively new products as well as the existence of significant operational obstacles. It points to the fact that even large mutual fund managers have found that current back-office operations are often inadequate for accommodating the newer ETF structure.

“We have been looking at the rise of actively managed ETFs for quite some time and we have every reason to believe that growth will continue,” said John Alshefski, Senior Vice President of SEI’s Investment Manager Services division. “While some managers may not currently realise the operational impact of implementing these strategies, as they continue to address these challenges and restrictions continue to loosen, we could be in for an explosion of active ETFs hitting the market in the next few years.”

“Pure index-based ETF asset classes have been accounted for,” said Tom Lydon, Editor, ETF Trends. “Now more and more of the bigger mutual fund players will embrace active ETF strategies as a way to enter the red-hot ETF market.”