Active ETFs: Get Ready ‘Cause Here They Come by Steve Abramowitz

“I’m giving you a love that’s true

And gonna make you love me, too

So get ready, get ready

‘Cause here I come.”

adapted from “Get Ready”

The Temptations, 1966

 

The Motown rhythm and blues quartet may well have divined the arrival of actively managed exchange-traded funds (ETFs). Can’t stop them now, ladies and gentlemen—they’re already here.

Leave it to the frantic asset managers who brought you the load fund and then repackaged it as no load with hidden excessive fees to invent a product to compete with the fabulously successful passive (or index) ETF. The fund purveyors needed to staunch the flow of assets from their high-fee mutual funds to passive ETFs and to convert their longstanding lucrative investment vehicle into one less profitable but more in demand.

A few members of the board arranged in plush leather chairs around a conference table devised a new portfolio wrapper to become known as the active ETF. The creation would combine the best features of passive ETFs—low cost, tax efficiency, flexible trading and transparency. Giddy with their redemption, the executives proceeded to resurrect those tactical acrobats of yesteryear called portfolio managers. They would attract investors alarmed by their absence in passive ETFs.

According to one prominent provider of active ETFs, these trading magicians would “uncover market opportunities and select investments with the goal of outperformance rather than merely tracking an index.” To sweeten the pot, active ETFs would come with a strategically placed price in between that of the inexpensive passive fund and of the exorbitant mutual fund.

Just how menacing is the active incursion onto the ETF landscape? Well, aggressively promoted by the asset management companies, it’s burgeoned beyond all expectation. The number of active ETFs has grown exponentially in the last five years from barely 600 to almost 2,500. Likewise, assets under management have ballooned from about 50 billion to almost 900. Distressingly, about 80% of recent ETF launches had a portfolio manager at the helm. The active ETF phenomenon is a juggernaut.

But is the new vehicle an improvement or even any good at all? Specifically, how does its performance stack up against the formidable passive index fund? I thought I would clarify some of the differences between the two fund types and do an illustrative back-of-the-envelope demonstration of comparative performance.

 I first consulted Morningstar’s list of the 28 best active ETFs to buy in 2025 based largely on their proprietary quantitative and analyst ratings. I then selected an active ETF from the T. Rowe Price mutual fund group, a leading provider which earned five of the 28 slots and with which I am familiar. I set out to analyze the Price Growth Stock ETF (TGRW) because of its pedigree and the ready availability of the Vanguard S&P 500 Growth ETF (VOOG) as the passive benchmark.

Let’s start out with an overview of the two contestants. Not surprisingly, both ETFs are classified by Morningstar as covering large growth territory. VOOG has been around a lot longer than  recently launched Price Growth and as you might expect it’s a whole lot bigger. The former’s net assets are currently 15 billion as against the latter’s barely a billion. It is also much better diversified, holding about 200 stocks as compared to 60. In addition, the Vanguard portfolio is considerably less concentrated, having a 53% weighting as opposed to 64% in its top ten stocks.  As befits growth funds in the recent market environment, both of these carry a high tech position, but Vanguard’s is notably smaller (about 40% rather than 50%).

We have here two funds that are quite similar, but the portfolio manager at Price has taken a more aggressive stance to achieve outperformance. So what happened?

I contrasted the funds’ results in thee calamitous 2022 market and the recovery in 2023. During the sharp decline, the somewhat less risky VOOG proved its mettle, dropping about 30% as its adversary plunged 10% more. This pattern was reversed in the following year’s tech-led burst, rewarding the Growth ETF’s manager for his daring.

But what about this year? How have these two ETFs fared in our chaotic market? The data are not eye-opening but a discussion of the trends is instructive. As of mid-March, VOOG and FGRW lost 8.9% and 10.2%, respectively. Several factors might be at work here. The expense ratio of Price’s growth ETF is .52, modestly below the expense of its mutual fund sibling but unconscionable in relation to VOOG’s .07 cost. Another contributor to the difference in performance may be FGRW’s much higher annual turnover rate of 50%. Its manager has incurred high trading expenses as a consequence of his frenetic quest for outperformance.

Do I hear somebody chortling in the back of the class that the difference in the year-to-date results (10.2% for VOOG, 8.9% for FGRW) is practically-speaking insignificant. I would reply that it’s anything but insignificant if it were to persist in a long-term investment plan. Say you’re 45, planning to retire in 20 years and boast a half a million appreciating in an IRA. Further imagine your son needs long-term care, so you won’t be able to make any more contributions. How much will that half million grow to at 8.9% vs. 10.2%?

With the help of the compound interest calculator at investors.gov, we learn that the seemingly small difference in the two rates yields a stark contrast in returns. The lower rate produces a 3.0 million account balance at age 65, whereas the higher rate yields a final figure of 3.8 million. I  submit that an $800,000 difference is indeed significant. Now recall the .45 discrepancy in cost of the two ETFs that will most likely hold about steady across time. Holders of Vanguard’s S&P 500 Growth ETF have that advantage locked in for the duration of their retirement plan.

Now let’s all calm down. This is more a demonstration than it is an upstanding piece of research. The numbers are true, but the time periods are woefully short. To be sure, this is not only a T. Rowe Price problem. It’s endemic to the active fund industry. We will have to “get ready” for the deeper penetration of the active myth into the ETF marketplace. That makes it all the more imperative to fend off for ourselves, our family and our friends the overblown promises of the financial services profession that benefits mightily from all the hoopla. To paraphrase those rhythm and blues lyrics, they want to make you love them, too.

 

 

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