ETFs shift from ‘core’ to ‘satellite’ in portfolios

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Exchange traded funds are increasingly vehicles of choice for active strategies and for tactical short-term use, a new study reveals, underlining how much has changed from their buy-and-hold, broad market historical origins.

Actively managed ETFs that guarantee protection against losses, leveraged or inverse strategies that reset daily and cryptocurrency investments topped the list of ETF strategies that appealed most to investors in the US, Europe, China, Hong Kong and Taiwan, according to the latest Brown Brothers Harriman survey of more than 300 institutional investors globally.

While about half of survey respondents said they used ETFs as “satellites” in their portfolios, only 40 per cent globally and 33 per cent in the US said they used ETFs as “core” exposure — a surprising result given how widespread the use passive index-based ETFs had become, said Tim Huver, managing director on BBH’s ETF servicing team.

“We do see this as a shift in terms of investor demand towards a greater offering of a variety products that may be used in very specific or precise ways, as opposed to broad-based beta in the past,” Huver told the Financial Times.

Active ETFs make up about 7 per cent of the $8.6tn US ETF market but have pulled in about 16 per cent of net inflows over the past three years, according to data from Morningstar Direct. They’ve garnered more than $78bn in flows since January, more than double the $31.5bn they attracted in the first four months of 2023.

Passive ETFs continue to dominate inflows, pulling in more than $78bn in April alone and more than $1.6tn since May 2021, according to Morningstar. However, active ETFs grabbed more flows than their passive counterparts in April, the first month that has happened since August last year.

Buffered ETFs, which cap falls in value in return for limits on upside, have proven particularly popular with investors. And ETFs that use derivatives to offer higher leverage or inverse performance have carved out a niche among traders and retail investors.

Cryptocurrency ETFs remain a topic of high interest globally for investors. Regulators in the US and Hong Kong approved spot bitcoin ETFs in January and April, respectively, while European investors can access a similar type of product called an exchange traded note.

“That was definitely something a lot of the survey participants said that they were bullish on for the year,” said Andrea Murray, BBH’s European business development manager for ETFs.