As highlighted in Trackinsight’s Global ETF Survey Report 2024, global active ETF assets have experienced a remarkable surge in both adoption and innovation, nearing the $700 billion mark worldwide. This growth spurt, especially pronounced in the United States since 2019, was significantly propelled by the SEC's introduction of Rule 6c-11 under the Investment Company Act of 1940, commonly referred to as the ETF rule.
This rule streamlined the process for launching and operating ETFs by setting uniform operating conditions, enhancing transparency through daily portfolio disclosures, and allowing for more flexible use of custom baskets in the creation and redemption process. These regulatory enhancements, coupled with the approval of non-transparent active ETFs, have broadened the ETF market, inviting a more diverse range of strategies and products.
Furthermore, the trend of converting mutual funds into active ETFs highlights a dynamic shift within the investment management sector, showcasing a move towards more innovative and flexible investment solutions that can adapt to changing investor needs and market conditions.
Active ETFs Challenges in Europe
While the momentum for active ETFs is evident in North America, Europe presents a unique set of challenges and opportunities. Assets in European active ETFs have seen their share growth, tripling since 2018 to reach $32 billion by end of 2023, but they still account for a minimal portion of the European ETF market, highlighting the vast potential for expansion.
The slower adoption rate of active ETFs in Europe can be attributed to various factors. Firstly, European investors generally lack enthusiasm, partly influenced by their historical preference for lower-cost passive strategies, which has impeded the acceptance of active ETFs.
Additionally, there exists a limited understanding among investors in the region regarding the functionality of active ETFs compared to traditional mutual funds or passive ETFs. Moreover, the absence of tax advantages similar to those in the United States has contributed to investor hesitancy.
Furthermore, regulatory barriers, notably the delay in obtaining approval for semi-transparent ETF capabilities, further obstruct innovation and the entry of new players into the market.
The fragmented nature of the European market, with its various currencies, geographies, and regulatory environments, also complicates the landscape for ETFs, affecting their liquidity and trading efficiency. With only a small number of active ETF offerings available and cautiousness among platforms, widespread adoption has yet to be witnessed.
Active ETFs with an ESG twist find success in Europe
Despite these challenges, there's a positive momentum for active ETFs in Europe, driven by the growing interest in ESG investing.
Europe has long been at the forefront of sustainable investing, witnessing a growing interest in ESG-labeled ETF products. As of 2023, total ESG ETF assets have exceeded $400 billion, with over $50 billion in new inflows each year for four consecutive years.
While 94% of the AUM in Europe's ESG ETF market is currently held in passively managed funds, there has been a significant uptick in interest towards actively managed ESG ETFs in recent years.
This trend mirrors the increasing sentiment among investors that actively managed strategies could potentially mitigate some of the limitations (highlighted below) associated with index-based funds.
Active Leaders in Europe
Several active ETF issuers strategically integrating active management with ESG principles have captured a growing share of new ESG investments, boosting active adoption in Europe. As of YE 2023, 74% of active ETFs AUM in Europe are ESG labeled.
Leading active adoption in Europe, J.P. Morgan Asset Management maintains a strong position in the region's active space. Their range of active funds, primarily focused on ESG strategies, attracted over $5.6 billion in new investments in 2023, resulting in a significant surge in the issuer's active AUM to $14 billion by year-end.
Other notable contenders in the region include PIMCO and Fidelity, boasting active ETF AUMs of $5.2 billion and $3.7 billion, respectively.
Cathie Wood sets to dock its ARKK on European Shores
Another player aiming to establish a foothold in the European market is ARK Invest, popular for its active thematic ETFs in the United States, led by Cathie Wood. The company expanded its presence into Europe and the UK by acquiring Rize ETF Limited in late 2023.
Wood has ambitious plans to introduce a series of active ARK funds in Europe, seeking to replicate the innovative and disruptive investment strategies that have seen success in the United States.
Bottom Line
Trends in the ETF space frequently transcend regions, as evidenced by the spread of ESG investing from Europe to the U.S. during the pandemic era, and more recently, the proliferation of crypto products in the U.S. following widespread trading in Canada and Europe through various forms.
While Europe has been slower to embrace active ETFs, it's clear that investor interest surges when the right conditions are in place. As regulatory hurdles are addressed and investor education improves, there is significant potential for active ETFs to gain traction in Europe's investment landscape, reflecting the trends observed in the US market.