Entering the Active ETF Race

November 16, 2023
  • Investor Services
Active ETFs show little sign of slowing down, as 82% of investors intend to increase or maintain their exposure to active ETFs. Chris Pigott, Eamonn O'Callaghan, and John Hooson highlight where the opportunities and benefits are for asset managers considering active ETF launches.

Investor interest in active ETFs continues to grow. BBH’s 10th Annual 2023 Global ETF Investor Survey showed that globally, 82% of investors plan to increase or maintain their exposures to the product. A PwC1 survey tells a similar story: 74% of ETF managers expect significant demand for active ETFs. While a record number of recent active ETF launches are the main driver of volume2, in the U.S. conversions from mutual funds to ETFs has also helped boost numbers, and the potential launches of ETF share classes in Europe and Asia may push the volume higher.

This growth does not come as a surprise. From an investor’s perspective, active ETFs bring multiple benefits such as tax efficiency, transparency, liquidity, ease of access, and low costs. In addition, while index-tracking ETFs have long been a key component of their toolkit, investors are now turning more frequently to actively managed strategies, as new products are brought to market which offer the potential for alpha, market downside protection, and/or alternative income. Actively managed ETFs also provide issuers opportunity to bring their investment expertise to the market in a different form and the potential for new distribution opportunities.

Below we outline the key considerations for managers adding actively managed ETFs to their portfolios.

Take the early lead

Managers entering the active ETF space will benefit from first movers’ advantage, allowing them to gather market share in a yet not too crowded field.

Active ETFs currently make up a small part of the overall ETF market (5% in the U.S., 1.5% in Europe, and 10% in APAC ex Japan3). While the active market is growing, it is relatively under serviced compared to the highly competitive passive index space, presenting opportunity for those managers who can launch in this early phase. Managers who already have in-house skills in running and managing active strategies may find it an easier flight path to gather market share and grow assets.

A look around the field

Active ETFs maintain a good growth pace in some markets and face a promising start in others:

  • In Asia, the first actively managed ETFs were launched in Japan in September 2023. While active ETFs are now available in markets like Hong Kong and South Korea, we expect other markets, like Taiwan, to follow suit
  • Australia has been a bright spot for active ETFs with active assets accounting for more than 17% of the ETF market
  • In Europe the 10-year CAGR for active ETFs is 21% and year to date growth is 33.7%4, which points to positive investor sentiment for active strategies. Managers such as JP Morgan Asset Management and Fidelity Investment Management have gathered significant market share of the active ETF segment with 38% and 10% respectively. In addition, Ark Invest’s acquisition of Rize ETF points to increasing interest in this segment
  • In the U.S., 75% of all ETF launches in 2023 were active ETFs, the highest since that type of fund started trading in 20085.

Try the ‘Biathlon’ through diversification

Diversification has become critical to meeting changing investor demographics and demands. By launching active ETFs with complementary strategies, managers can establish a new product offering, which can sit alongside their existing product suite, to provide choice to the market. This provides a new distribution channel giving managers exposure to a new pool of investors who they have not previously sold their products to.

Diversification will also ensure that managers can adapt to market trends. In recent years, mutual funds have suffered outflows into more low-cost products such as ETFs. In 2022, $856 billion poured into ETFs globally while outflows from mutual funds were more than $800 billion6. To mitigate these outflows, managers can opt to launch their own active ETFs, and thus redirect those investors looking to switch from mutual funds into their own active ETF range.

The Finish Line

Even with modest growth in active ETFs it could be a $1.2 trillion market by 20337, making it a race definitely worth running.

To reach that end may require managers to consider new processes and personnel. This involves a strategic pairing of talent and technology, such as adding a Capital Markets team. For some running an active ETF is like an active mutual fund – the stock screening, analysis, and selection they are already performing for their mutual funds are easily transferable into the ETF wrapper. The regulatory structure and domicile are likely to be the same as what they have for their existing products.

Finally, the ability to launch an ETF share class within a mutual fund, or an unlisted share class within an ETF, enhances speed to market, enables managers to leverage performance history and scale, and provides an alternative route to entering the ETF market.

If you have any questions or would like further information, please reach out to Chris Pigott (chris.pigott@bbh.com), Eamonn O'Callaghan (eamonn.ocallaghan@bbh.com), or John Hooson (john.hooson@bbh.com).

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1Recent survey from PwC
2Number of active products at August 2023: ETFGI Active ETF and ETP Industry Insights, September 2023
3Source: ETFGI: ETFGI Active ETF and ETP Industry Insights, September 2023 | ETFGI LLP
4Source: ETFGI: ETFGI Active ETF and ETP Industry Insights, September 2023 | ETFGI LLP
5Source: Morningstar Direct
7This figure is based on BBH’s prediction that the active ETF market will grow to 4% of the global ETF market by 2033

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