Active exchange-traded funds (ETFs) are witnessing a significant upswing in Europe, mirroring their earlier success in the United States. According to data from Morningstar Direct, these actively managed funds have seen consistent inflows for seven quarters, amassing €9.3bn and raising total assets to €30.7bn. This trend contrasts sharply with Europe’s active mutual funds, which have experienced an outflow of €340bn over six of the past seven quarters.
The rise of ETFs is largely driven by client demand, as they are often cheaper than mutual funds and more compatible with emerging digital platforms. However, unlike mutual funds, ETFs do not pay "rebates" to distributors, which has historically limited their distribution through traditional networks.
Institutional investors such as pension funds, central banks, and sovereign wealth funds are significant users of ETFs. The retail segment in Europe, currently accounting for less than a fifth of the market, is beginning to grow, particularly among Gen Z investors. This growth is expected to introduce a variety of new solutions.
JPMorgan (NYSE:JPM) Asset Management (JPMAM) leads Europe's active ETF market with its US (JREU) and Global (JREG) Research Enhanced Equity (ESG) Ucits ETFs dominating the inflow charts for the first nine months of this year. Other firms including Fidelity International, Pimco, Axa, WisdomTree, Investlinx, and Franklin Templeton have also reported inflows into their actively managed ETFs.
New entrants like Ark Invest and Robeco are attracted by the burgeoning popularity of ETFs. Ark Invest is planning a European expansion via its acquisition of Rize ETF, while Dutch asset manager Robeco has announced its first ETFs.
The trend towards active ETFs offers a glimmer of hope for traditional active fund managers who are grappling with cheaper passive index-tracking funds but necessitates an acceptance of lower fees.
In the US, where ETFs receive more favorable tax treatment than mutual funds, actively managed funds account for 5% of the $7.5bn US ETF market but represented 25% of this year’s net inflows, as per JPMAM. Europe, with equal tax treatment for both fund types, is beginning to follow this pattern.
JPMAM sees substantial potential in the fixed income sector due to the structure of bond indices. However, future growth may not be straightforward, particularly for active ETFs that fail to generate alpha (outperformance). Moreover, an ETF version of a mutual fund with lower fees could lead to fee compression and costly outflows from the latter.
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