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Actively managed exchange traded funds have surged to 30 per cent of all ETF assets in some countries, pointing to huge growth possibilities in the US and Europe where active ETFs still have a far smaller market share.
The figures also point to a potential avenue of growth for under-pressure active mutual fund managers, many of which are haemorrhaging assets as money flees to lower-cost passive investing.
“Every conversation we have with managers now is legacy mutual fund managers looking to get into ETFs. That’s where the money is flowing,” said Ciaran Fitzpatrick, head of ETF solutions, Europe, at State Street.
The rise of actively managed ETFs “is a global trend and we think it’s going to accelerate”, said Frank Koudelka, global ETF product specialist at State Street. “It has increased by close to 50 per cent [a year] in recent years. That’s the white space in the market. For the most part passive is covered by the big three providers, maybe the big six if you go across the world.
“It’s now almost exclusively active managers entering the ETF landscape, be that North America, be that Europe or be that Asia. Managers say they have to be in the market, that ‘I have to participate or I’m going to get my clock cleaned’.”
Active ETFs now account for 30.7 per cent of the $315bn Canadian ETF market, according to data from Morningstar Direct. Likewise it is 29.4 per cent of the $93bn South Korea market and 11.8 per cent of Australia’s $65bn ETF sector.
These figures are likely to rise still further, with active funds accounting for 52.3 per cent of net ETF inflows in Canada last year, per Morningstar, and 86.7 per cent in South Korea.
They eclipse those in the US, where a host of household names such as Fidelity, Pimco and JPMorgan have flooded into the space, but active only accounts for 6.8 per cent of the $8.2tn ETF market, although it did grab 22.2 per cent flows in 2023.
The concept is even less well developed in Europe, where just 2.6 per cent of the $1.6tn of ETF assets in the two largest domiciles of Ireland and Luxembourg are in active funds, with their share of flows only a little higher at 4.8 per cent last year.
Todd Rosenbluth, head of research at the VettaFi consultancy, said “the strong adoption of active ETFs in Canada provides perspective on the opportunities globally”.
Deborah Fuhr, co-founder of ETFGI, another consultancy, said this growth was driven in part by Canada’s distribution regime, which is controlled by banks that are happy to put ETFs on their platforms, in contrast to the situation in much of Europe and elsewhere.
Koudelka attributed the genesis of Canada’s active ETF boom to a regulation called CRM2, introduced in 2016, that required investment advisers to disclose the fees their clients were paying more clearly.
They reacted by ditching mutual funds for ETFs, which are typically cheaper as they do not need to cover the cost of commissions paid to distributors.
Kenneth Lamont, senior fund analyst for passive strategies at Morningstar, said 440 of Canada’s 900 ETFs are now actively managed. However, he argued that most of these are not old school stockpicking funds but rather “systematic” active strategies, such as quant funds and covered call strategies.
“They are not active managers, traditional stockpickers, moving into the active ETF space per se,” Lamont said. “You don’t see dyed-in-the-wool stockpickers launching cloned versions of their mutual funds.”
In Australia, in contrast, a number of houses are dual listing traditional stockpicking mutual funds as ETFs, said David Tuckwell, senior product and investment strategist at Global X ETFs Australia.
Tuckwell cited two reasons for the move. Firstly, many distribution platforms charge mutual funds — but not ETFs — a fee to be listed.
“The other reason is that if you are a mutual fund with a long track record and you have underperformed, if you launch an ETF you get a fresh slate. That provides a way to wash away underperformance. Some have launched the ETF versions after a period of sharp underperformance,” Tuckwell said.
Despite this, he did not believe active ETFs would continue to increase their market share in Australia. Indeed, they grabbed just 8 per cent of net inflows last year.
:“I don’t think it’s going to carry on growing,” Tuckwell said. “It’s very clear that the Australian market wants to consume low-cost passive index products.”
As for South Korea, Fuhr attributed active ETFs’ outsize share to regulatory support for ETFs and unusually high take-up by retail investors, particularly for thematic ETFs.
Interest in active ETFs in the US has also hit record levels, accounting for 48.2 per cent of all ETF buying in January, according to Morningstar. Koudelka sees more “quality” US managers entering the European market, where active ETFs are likely to benefit from an influx of retail investors, particularly Millennials and Gen Zs who “don’t like mutual funds”.
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Despite this, not everyone is convinced that active ETFs’ high take-up in some countries means they can achieve similar levels of penetration in the US or Europe.
In the latter, financial advisers “are still paid to sell products” in many jurisdictions, said Fuhr, encouraging them to sell commission-heavy mutual funds and potentially stymying the growth of active ETFs.
In the US “active has been gaining share off a small base”, said Rosenbluth. “However, given the pre-existing base in America for [passive] ETFs tied to the S&P 500 and Bloomberg Aggregate indexes, active is likely to remain less than 20 per cent of the pie in the next decade,” he argued.
