ETF Market Sees Growth in Active Portfolios and International Investments

Capital Group Expands into Active ETF Model Portfolios

The Exchange-Traded Fund (ETF) market is undergoing a transformation as Capital Group, one of the world’s largest active asset managers, announced its entry into the active ETF model portfolio space. The firm is rolling out eight model portfolios composed entirely of its active ETFs, reflecting a broader industry shift toward managed investment solutions.

With $53 billion in assets across its 22 existing ETFs, Capital Group is positioning itself to compete with major broker-dealers who have traditionally dominated the $2 trillion U.S. model portfolio market. These model portfolios provide pre-constructed investment solutions, appealing to financial advisors and retail investors looking for managed diversification.

The move aligns with a growing trend in the financial advisory space, where advisors are shifting away from individual stock-picking in favor of structured portfolios that cater to specific risk levels and long-term investment goals. With other major U.S. asset managers exploring active ETFs, Capital Group’s entry signals a larger industry move toward active management within the ETF landscape.

This shift follows the broader rise of active ETFs, which offer the benefits of traditional ETFs—including tax efficiency and liquidity—while incorporating active portfolio management. Many analysts expect more active ETF offerings in the near future, particularly as advisors and investors look for ways to navigate a volatile market.

Investors Shift to International ETFs Amid U.S. Market Volatility

With U.S. markets experiencing recent downturns, investors are diversifying their holdings by allocating funds to international ETFs, particularly those focused on Europe and China. Over the past few months:

• The Vanguard Total International Stock ETF has gained 6%.
• The Vanguard FTSE Europe ETF has climbed 13%.
• The KraneShares CSI China Internet ETF has surged 21%.
• In contrast, the S&P 500 has fallen by 5% in the same period.

These strong performances from global ETFs suggest that investors are seeking growth opportunities outside the U.S., where trade tensions and economic uncertainty have dampened sentiment. However, analysts caution that while international ETFs offer exposure to diverse markets, many remain tied to the U.S. economy.

For example, companies within the Vanguard FTSE Europe ETF derive 24% of their revenue from the U.S., meaning that a recession in the U.S. could still impact these funds. Meanwhile, the International Monetary Fund (IMF) estimates that U.S. economic performance is 75% correlated with that of other major economies, indicating global ripple effects from U.S. market movements.

Challenges in international markets could also pose risks. In Europe, government spending plans are facing resistance, with Germany blocking an €800 billion EU defense package. In China, while the tech sector has seen gains, tariff disputes with the U.S. are prompting concerns over future growth, with UBS downgrading Chinese tech stocks in anticipation of new economic restrictions.

ETF Market Poised for Further Growth

As institutional investors and retail traders alike seek greater diversification and active management strategies, the ETF market is expected to continue evolving. Analysts predict:

• More active ETF launches as firms like Capital Group compete in the space.
• Continued investor interest in international ETFs, despite ties to the U.S. economy.
• Regulatory shifts that could impact the structure and adoption of actively managed ETFs.

In the face of economic uncertainty and stock market volatility, ETFs remain a popular choice for long-term investors, offering broad diversification, liquidity, and tax efficiency. As Capital Group and other major firms push new active ETF strategies, the ETF market will likely see continued growth and adaptation in the months ahead.