Passive Gets Active: the Latest ETF Trend

Jason
Xavier,
head
of
EMEA
ETF
Capital
Markets
at
Franklin
Templeton,
wrote
that
“the
whiff
of
a
new
era
for
investing
is
in
the
air,
one
that
will
bring
active
management
back
into
vogue”.
More
recently,
Ryan
Jackson,
Morningstar’s
US
analyst,

said
that
“seemingly
overnight,
active
ETFs
ascended
from
obscurity
to
ubiquity.
Their
rise
stems
from
a
mixture
of
legislation,
product
development,
and
market
events
and
trends
that
pulled
their
unique
advantages
into
focus.”

Active
ETFs
in
Europe

According
to
Morningstar
data,
active
ETFs
raised
€6.7
billion
in
2023
(£5.7
billion),
up
from
€2.4
billion
in
2022.
Assets
reached
€28.9
billion
(€20.1
billion
in
2022).
They
represent
1.8%
of
the
assets
invested
in
exchange
traded
funds
in
Europe
(it
was
1.5%
the
previous
year).

Initially,
the
development
of
active
ETFs
took
place
mainly
within
bond
strategies.
Pimco
US
Dollar
Short
Maturity
ETF
and
Pimco
Euro
Short
Maturity
ETF
are
two
examples
of
such
products.
But
in
recent
years,
expansion
has
been
through
equity
strategies.
Among
the
most
recent
debuts
are
three
JPMorgan
asset
management
products
in
US
large-cap
equities,
which
give
investors
access
to
the
core,
value
and
growth
portfolios
of
top
portfolio
managers.

“Established
players
such
as
JPMorgan
–
which
has
a
market
share
of
close
to
44%
in
this
segment
–
and
Fidelity
have
built
their
ETF
range
mainly
with
active
ETFs,”
explains
José
Garcia-Zarate,
associate
director
for
passive
strategies
research
at
Morningstar
in
Europe.
“In
addition,
new
players
entering
the
ETF
market,
such
as
Robeco,
also
seem
to
be
heading
towards
this
segment.
This
trend
could
mean
that
the
market
for
traditional
passive
strategies
is
rather
saturated,
and
it
is
not
easy
for
those
entering
now
to
make
their
way
in
and
gain
significant
positions.”

The
Rise
of
Active
ETFs
Worldwide

According
to
Morningstar’s
latest
Global
Fund
Flow
Report,growth
rates
of
active
ETFs
worldwide
outpaced
those
of
traditional
index
funds
in
2023:
+37%
versus
+8%,
on
an
organic
basis.

Actively
managed
equity
ETFs
alone
grew
48%
on
an
organic
basis
last
year.
The
category
has
been
booming
since
2020
and
shows
few
signs
of
slowing
down.
The
lion’s
share
is
held
by
the
US:
out
of
global
assets
of
$342
billion,
$287
billion
are
attributable
to
the
US
market.

That
the
phenomenon
has
now
gone
global,
however,
is
shown
by
the
fact
that
active
non-US
domiciled
ETFs
grew
by
28%
last
year.

The
Rise
of
Active
ETFs
in
the
US

Morningstar
also
calculated
that,
in
each
year
since
2018,
active
ETFs
have
had
net
flows
of
at
least
$25
billion
and
experienced
an
organic
growth
rate
of
more
than
30%
in
the
United
States.

Investors’
rush
towards
these
instruments
heavily
penalised
traditional
active
funds,
and
for
the
first
time
in
2023,
the
assets
of
passive
strategies
exceeded
–
albeit
slightly
–
those
of
active
ones
($13,293
billion
versus
$13,234
billion).

More
Active
ETFs
and
Less
Strategic
Beta

Active
ETFs
are
becoming
the
benchmark
for
investors
seeking
to
generate
value
with
exchange
traded
funds
at
the
expense
of
smart
strategic
beta.
The
industry
has
realised
this
and
responded
with
the
launch
of
numerous
such
products,
in
and
outside
the
US.

“Fewer
ETF
issuers
are
incentivised
to
launch
new
and
innovative
funds
in
the
now-mature
strategic-beta
ETF
market.
Downward
fee
pressure
is
pushing
smaller
providers
out
of
the
space,
while
higher-priced
active
or
alternative
ETFs
provide
new
and
potentially
lucrative
opportunities
for
emerging
ETF
issuers,”

says Mo’ath
Almahasneh,
associate
manager
research
analyst
at
Morningstar.

The
analyst
is
convinced
that
this
trend
will
continue
in
2024,
further
reducing
the
number
of
strategic
beta
ETF
launches
and
possibly
increasing
closures.

Will
ETFs
also
Become
Increasingly
Active
in
Europe?

According
to
experts,
it
is
not
only
the
market
saturation
of
traditional
passive
strategies
and
the
consequent
search
for
new
ways
to
enter
the
ETF
industry
that
is
driving
the
growth
of
these
instruments.
“The
growing
popularity
of
the
ETF
‘wrapper‘
as
an
investment
vehicle
is
evident,”
Garcia-Zarate
says.
“Although
ETFs
have
traditionally
been
identified
as
passive
funds,
the
reality
is
that
they
are
just
vehicles
and
there
is
no
barrier
to
the
distribution
of
active
strategies.” 

The
Advantages
of
Active
ETFs

Compared
to
a
mutual
fund,
an
active
ETF
has
several
advantages,
including
cost,
because
all
other
things
being
equal,
ETFs
tend
to
be
cheaper.
Other
advantages
are
real-time
stock
market
trading
and
transparency
(many
of
these
instruments
make
their
portfolio
positions
available
on
a
daily
basis).

But
beware
–
active
ETFs
do
not
appear
to
be
perfect
substitutes
for
traditional
actively
managed
funds.
“Our
first
analyses
of
this
market
reveal
that
the
active
strategies
typically
sold
in
ETFs
do
not
exhibit
the
full
flexibility
of
a
traditional
active
fund,”
Garcia-Zarate
clarifies.
“Yes,
they
are
active,
but
to
a
certain
extent
because
they
have
to
keep
the
tracking
error
against
the
benchmark
within
acceptable
levels
and
thus
contain
turnover
and
management
costs.”

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