Why active and fixed income ETFs are gaining momentum

Welcome to ETF Edge, your go-to place for all things exchangeraded funds. I'm your host, Dominic Chu. Investors are increasingly shifting to active strategies as they look to expand beyond the magnificent seven trade. TCW finds more than 40% of flows this year have been from active ETFs, up from 10% last year. So, why are actively managed ETFs becoming more appealing? Joining me now for this conversation is Jennifer Granio, TCW's global head of distribution, and Todd Rosenluth, TMX Vetifi's head of research and editorial. Thank you both for being with us in studio today as well. >> It's great to be here. >> Thanks a lot. >> All right, so let's have this conversation because active ETFs have been the talk of the town for quite a few years now, but they're getting a lot more attention over the last one or two years because we've seen a flood of new product come to market. And maybe Jennifer, I'll start with you. As somebody who heads up distribution and runs an ETF business that does a lot of active ETFs, what exactly has been the primary driver for this kind of secular force in ETFs towards active management as opposed to straight up index investing? >> Yeah, thank you for the question. And at TCW, the firm actually started as a fundamental equity manager. And we're known for that fundamental equity management, but also public and private credit. And so when we look at active ETFs on the equity side, what we've been doing at TCW for many years is looking at how do you add mega themes in addition to what you might already have from an indexation perspective and the indexes are now so tech heavy and maybe we can talk a little bit more about it later but on the equity side being able to have an active manager who can invest in mega themes that are cross- sector we think is a really important opportunity and at TCW powered and AI are two ETFs that people can put in the portfolio and really add the active management to outperform in these areas. >> Uh specifically, you mentioned the power and the AI. They are they they very much go hand in hand these days because we're talking about AI being the overarching umbrella and then we're talking about everything resource infrastructure-wise it'll take to power that AI kind of revolution. When you look at the development of active ETFs, those two are the two big ones that you have at market right now. What exactly drives somebody to put an active ETF together? What how do you pick which theme to not chase so to speak, but to go after? And is it straight up say shareholder investor demand? Do you do focus groups? What exactly do you see in the marketplace that says, "Hey, we should put a product to market like this." >> Yeah. At TCW, we're looking for very very long-term structural themes. Um, so as you said, the demand or the short effectively we have in power and all the work going into grids and more power, power availability and all of the enablers of that in the infrastructure. That's the theme that we're going to be with for decades to come. And in our AI area, the ETF we run there is AI FD. We've been doing that as a strategy since before active ETFs were a thing. And in that case, it's a very long track record where we actually converted a mutual fund to an ETF. And the reason that we're running these strategies as ETFs is that that's where the demand is in the market. It's really changed in the last, as you said, just the last couple of years. And so on the equity side, as an active manager, we don't have to be pigeonholed into a narrow sector. We can be multis- sector against a huge theme. And we can talk more about fixed income, but that's what we do on the equity side. Interesting, Todd, because from a thematic standpoint, there are reasons why certain parts of the market garner more investor attention, whether it be through news headlines, whether it be through performance chasing or or returns that are getting a lot of headlines these days. What exactly from your standpoint is the big thing driving some of the thematically oriented, actively managed ETFs that are coming to market? I I can't keep track of all of them because they're coming so quickly. But what exactly is the kind of thinking behind how you put together an actively managed product for one specific theme or element and what exactly do you think is the long-term outlook for the many many ETFs that are following these types of plans? So I think AI has been core for many of the thematic strategies that are out there whether they're active or they're more researchdriven indexbased products. So we at Vetify are an index provider in part behind the range nuclear renaissance ETF Nukes which is a nuclear energy ETF. We've seen some demand for the Robo Global Artificial Intelligence ETF Think THNQ and then we've seen even more narrow slices. So we there are now photonix ETFs and there's more to come. Um, we think that we're going to continue to see the industry and advisers and investors adopt these products to complement the Q's which has some exposure to it but also has exposure to broader uh mega cap growth stocks. Interesting because when we talk about the strategies that many invest investment advisors and and and and retail investors have, they they typically have a core group of holdings or a crew a core type portfolio and then they look to kind of bolt on or chase outperformance or alpha in some of the kind of more fringe areas that they can find that outperformance in. How much do the ETFs that we know and have known for decades that are core parts of this portfolio, how much do you think that they lose out in terms of their interest or investor appetite to some of these other actively managed ETFs? Say if you hold a S&P 500 index fund and then you try to kind of outperform by underweing or overweing certain key parts of the market. How much more attention do those areas in active management have Todd versus those core holdings that again we've come to know for the decades now at this point? >> So I think we're still going to see the S&P 500 based products the NASDAQ 100based products remain core but what is starting to shift is whether investors overweight towards sector products and state street is the leader within the sector suite of products or they use thematic ETFs to get a more targeted exposure. So artificial intelligence covers more than just the technology sector. It impacts other sectors as well. Utilities, industrials are impacted uh by artificial intelligence drivers as well. So we've seen some advisers use that 5% overweight instead of going into the technology sector spider. They might be looking towards a artificial intelligence ETF as a as an alternative. You know, Jennifer, it's an interesting point because when we talk about say the sector ETFs that we've kind of grown accustomed to, industry-based ETFs and now the rise of thematic ETFs, there's a case to be made or an argument that you could be both more narrowly and more broadly focused with a thematic product because a thematic product could span multiple industries and sectors and some sector products might encompass certain areas of the market that other ones don't. How exactly then do you treat thematic versus sector versus industry? These are all very specific ETFs tied to maybe more nuanced core markets, but they're not necessarily just a one-sizefits-all. They do a lot of different things. How do you have to philosophically treat those from a portfolio standpoint knowing that they're not just say this particular thing and that it could go across many different areas of the market? I mean I think the big question for an investor and at TCW we're mostly working with financial adviserss who are working on behalf of end investors and institutions the big question is how active are you every day on micromanaging your exposure and at TCW we're designing products that are broad thematics so that for an adviser who's focused on overall return long-term alpha in the market they don't have to be tinkering with the portfolio every day. the more you get into a sub- sector, the more you should probably be tinkering with the portfolio in terms of sector weightings. And so every every firm has a different approach. And at TCW with both powered and AIFD, we have an approach where we're very broad so that you don't have to worry about tinkering with the subsectors. You can take that 10% out of core, put it into these two big themes, and then we're managing them across subsectors and across industries for the adviser to save them time on behalf of the end client.