The extent of the growth within the active ETF market is outlined by Travis Spence, head of active ETF distribution at JP Morgan Asset Management.
He says: “The active ETF market globally has more than tripled since the end 2020 to $687bn (£538bn). Although this only represents about 6 per cent of the total ETF market, in 2023 active ETFs accounted for 20 per cent of net flows, and nearly 28 per cent to date in 2024.
"Overall, active ETFs have been growing at a compound annual growth rate of about 50 per cent over the past five years, more than double the rate of the broader ETF industry."
Spence adds that over the past year 60 per cent of the new products coming to the ETF market are active, and notes one of the major growth areas is within the UK, where investors are switching their active open-ended fund exposure into active ETFs, which invest in the same way and have the same manager.
At present there are 90 active ETFs within the Ucits structure for UK investors to access.
In terms of where he sees the future growth in this space coming from, he feels that as clients become more comfortable with the active ETF structure, they will switch their existing asset class investments into the newer structure.
Our sister publication the Financial Times recently reported that regulators at the Central Bank of Ireland, the country with the largest number of ETFs domiciled there, are contemplating changing existing rules that require providers to disclose on the factsheet the entire holdings within an ETF, rather than just the top 10, as is the case with other open-ended fund structures.
UK wealth manager Brewin Dolphin does not presently allocate any of its client capital to active ETFs.
David Hood, head of central investment solutions at the firm, says: "Active ETFs have seen significant growth in the US over recent years. The tax regime in the US is friendlier to ETFs in general than it is to mutual funds. Therefore, the impetus to launch active ETFs has been stronger.
"In the UK and Europe, ETFs and open-ended funds are on a more level playing field in terms of tax efficiency and so the advantages are not so clear cut.
"We haven't, therefore, seen the same growth in active ETFs on this side of the Atlantic."
Nick Wood, head of fund research at Quilter Cheviot, says that while he does not presently allocate any of his client’s capital to active ETFs, he does expect the segment to grow.
He says: “At present we do not invest in active ETFs, but we think for European investors they are likely to become more mainstream and a growth area in the next three to five years.
"At a basic level, they offer some small advantages over traditional open-ended fund structures. They will likely be slightly cheaper, as underlying costs borne by a mutual fund are not borne by an ETF structure. They will only amount to a few basis points most likely, but with costs such a focus, we think this is relevant.
"They also benefit from being able to be traded throughout the day, and with intra-day pricing, as opposed to more rigid and longer settlement periods for open-ended funds. Of course for most investors, buying an investment should be a long-term consideration, but at the margin this is helpful.”
Wood adds: “We have seen some of the largest asset managers such as JPMorgan and BlackRock begin to make a push into the European market. That is in itself likely to spur growth as they increase marketing in the space.
"As it stands today, most active ETFs are relatively low risk and what might be described as index+. In other words, fairly diversified and seeking to offer fairly low risk exposure and to outperform the index by a relatively small amount.
"This is in part because active ETFs are not best suited to portfolios that are potentially capacity constrained, or where the asset manager does not want to disclose holdings on a very regular basis. The result is that active ETFs in Europe may end up being a competitor to passives initially.
"The most obvious exception to this is the recent launches by Cathie Wood’s Ark Invest in April of three active ETFs for European investors. These can best be described as relatively concentrated, high conviction and growth biased.
"However, Ark are somewhat differentiated in that they have always been very open in terms of holdings and indeed their research as part of their investment process and philosophy.
“So what might hold active ETFs back? Practicalities in the first instance. Generally platforms are not set up to trade ETFs, so for the average retail client, they may be out of reach for some time yet.
"Overall I see this space growing over time, albeit one should bear in mind that an ETF is simply the shell in which an investment strategy is placed, and little else. Perhaps we are seeing the next generation of vehicles that will overtake mutual funds in size over time though."
One area where JPMorgan do not expect material growth within its own range is thematic ETFs.
david.thorpe@ft.com
