Will Active ETFs Take Europe by Storm?

However,
the
active
ETF
landscape
in
Europe
has
experienced
huge
growth.
As
of
March
31,
2024,
Morningstar
data
shows
that
the
87
active
ETFs
now
available
on
the
continent
had
accumulated
a
whopping
€33.8
billion
(£29
billion)
in
assets. 

These
findings
are
contained
in
Morningstar’s
report,

Active
ETFs
in
Europe:
Small,
Shy,
and
on
the
Rise,
which
tracks
the
proliferation
of
active
ETFs,
the
ETF
houses
holding
the
most
assets,
and
how
the
European
market
for
ETFs
differs
from
other
parts
of
the
world.

Why
Are
ETFs
so
Popular?

ETFs
have
shot
up
in
popularity
because
they
are
seen
as
a
low-cost
alternatives
to
expensive
active
funds.
This
is
a
train
that
active
managers
could
jump
on
to
better
compete
against
the
wave
of
low-cost
passive
investment
vehicles,
which
have
pulled
thousands
of
clients
away
from
the
active
space –
or
so
some
argue.

Indeed,
the
three-month
rolling
average
Morningstar
Representative
Cost
Ex
Transaction
Fee
(Annualised)
for
European
active
ETFs
in
Europe
shows
a
steady
decline
in
fees
has
taken
place.
 

Representative
costs
were
at
0.41%
for
ETFs
in
March
2013
but
they
had
dropped
to
0.28%
by
March
2024,
highlighting
the
European
ETF
Market
knows
that,
to
win
over
clients,
it
must
provide
affordable
costs.
 

What
Kinds
of
ETFs
Are
People
Buying?

Active
ETFs
first
developed
within
the
fixed
income
asset
class,
but
now
most
flows
are
piling
into
equity
strategies.
Most
of
these
products
have
seen
net
positive
flows
over
the
trailing
12-month
period
to
the
end
of
March
2024 –
of
around
€6.4
billion.
 

Even
though
European
active
equity
funds
have
suffered
outflows,
active
equity
ETFs
have
bucked
the
negative
trend,
with
JP
Morgan’s
and
Fidelity’s
research-enhanced
ranges
capturing
the
bulk
of
inflows.  

Flows
into
fixed
income
active
ETFs
over
the
past
two
years
have
been
a
mixed
bag.
Flows
have
largely
been
driven
by
the
largest
bond
fund
in
the
cohort:

Pimco
USD
Short
Maturity
ETF.
This
fund
experienced
more
than
€1
billion
in
outflows
in
the
month
of
November
2023
alone,
as
investors
tactically
reallocated
away
from
short-term
USD
rates.

Over
2023,
active
ETFs
in
the
ultra-short-term
European
bond
space,
such
as

Pimco
Euro
Short
Maturity
ETF,

JPM
EUR
Ultra
Short
Income
ETF,
and

Franklin
Euro
Short
Maturity
ETF,
experienced
outflows. Meanwhile,
funds
invested
in
longer
maturities
gained
net
inflows
during
the
same
period.  

ETFs
present
a
growth
opportunity
for
active
managers,
but
so
far
assets
have
mostly
funnelled
to
a
few
issuers,
like
J.P.
Morgan,
Pimco,
and
Fidelity. 

Equity
ETFs:
Young
and
Shy

In
the
US
market
high-conviction
ETFs
are
common,
but
these
are
few
and
far
between
in
Europe.
ARK’s
April
2024
debut
in
the
UCITS
market
bucks
this
trend, but
ARK
seems
to
be
the
exception
rather
than
the
norm. 

The
median
European
active
ETF
investing
in
equities
holds
more
than
150
stocks
in
its
portfolio;
three
quarters
were
launched
in
2020
or
later;
and
all
equity
vehicles
are
domiciled
in
Ireland,
with
the
vast
majority
integrating
ESG
factors
into
their
processes.
 

Primarily
consisting
of
region-specific
themes
and
research-enhanced
strategies
that
share
several
similarities,
the
JPM
and
Fidelity
ETF
ranges
display relatively
low
base
fees
and
demonstrate
a
benchmark-constrained
portfolio
construction
approach. 

Such
tight
constraints
offer
an
easier
entry
point
for
investors
andd
the
low
fees
make
them
more
competitive.
The
second
group
of
active
ETFs
includes
more
niche
and
expensive
products
that
have
been
launched over
the
last
two
years.
For
instance,
the

AXA
Biodiversity
and

Climate
Equity
strateges,
or
JPM’s

US
Value
and

Growth
ETFs. 

Multi-Asset
Active
ETFs:
The
Right
Time?  

Only
a
few
asset
managers
have
ventured
into
actively-managed
multi-asset
ETFs.
Indeed,
Morningstar
takes
the
view
that
lower-cost
active
ETFs
can
have
a
disruptive
role
in
multi-asset
investing
space.
Our
analysts
argue
passive
structures
have
been
unable
to
establish
themselves
in
an
arena
that
needs
active
thought
processes. 

Four
major
players
now
dominate
this
small
field.
DWS
led
the
way,
offering
two
balanced
active
ETFs
funds
more
than
a
decade
ago.
Then
in
2020
came
BlackRock
(whose
active
ETF
products
were
recently
rebranded
as
iShares)
and
then
Vanguard.

Their
respective
ranges
share
several
commonalities,
offering
a
globally
diversified,
one-stop
solution
spanning
multiple
asset
classes,
with
strategic
asset
class
splits
in
accordance
with
their
target
risk.

The
relative
cheapness
of
the
iShares
and
Vanguard
ranges
represents
a
major
edge
relative
to
traditional
multi-asset
funds
and
makes
them
potentially
enticing. 

Meanwhile,
Amundi
essentially
acquired
its
multi-asset
products
in
the
Lyxor
deal.
But
in
many
European
countries,
the
challenge
will
come
from
local
players
who
already
provide
multi-asset
products.
They
are
heavily
dependent
on
commission-based
remuneration
models
and
so
have
little
incentive
to
endanger
their
existing
fund
range
and
the
high
costs
they
charge
on
active
mutual
funds. 

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