Active mutual fund managers are decreasing the use of passive exchange-traded funds in their portfolios, a shift that leaves more of their performance numbers up to their own investment picks.
About 7 per cent of actively managed equity fund managers now hold at least one ETF in their portfolios, a 22-per-cent decline from the roughly 9 per cent of portfolio managers who held ETFs at this point three years ago, according to Lipper data.
Fund managers that do use ETFs include an average of 1.6 funds in their portfolios, while 103 active equity funds hold a benchmark-tracking ETF among their 10 largest holdings, according to Lipper.
The decline in the usage of ETFs coincides with improving performance numbers among equity managers overall. Approximately 52 per cent of actively managed equity funds are outperforming their benchmarks this year, double the 26 per cent that beat their benchmarks in 2016, according to Lipper.
Fund managers may be using fewer ETFs because of concerns the U.S. stock market is overvalued as it continues to touch all-time highs, said Todd Rosenbluth, director of fund research at New-York based CFRA.
The benchmark S&P 500 is up 12 per cent for the year-to-date and trades at a trailing price-to-earnings ratio of 22.3, well above its historical average of 15, according to Thomson Reuters data.
"With the market having climbed higher in the past year it may be that some managers are moving to cash or the sidelines and becoming more concerned about valuations," said Mr. Rosenbluth.
At the same time, there may be a growing hesitancy among active fund managers to use passive funds at a time when ETFs are taking the vast majority of investor inflows, Mr. Rosenbluth added. In July alone, investors put $10.8-billion into U.S. passive equity funds, up from $9.3-billion the month before, and pulled $19.6-billion out of funds run by traditional stockpickers, according to Morningstar data.
"As more money goes into passive vehicles it puts pressure on active management firms, and it may be harder to justify internally adopting a competing product into your portfolio," Mr. Rosenbluth said.