Active exchange-traded funds (ETFs) are set to take center stage in Europe’s investment ecosystem, with predictions for 2025 indicating their dominance among new launches. State Street’s 2025 ETF Outlook anticipates active ETFs will exceed 10% of overall flows, up from 7% last year, thanks to more than 400 anticipated ETF launches and assets under management (AUM) for Europe-listed exchange-traded products (ETPs) expected to surpass $2.8 trillion by the end of the year. This remarkable growth, representing more than 25% from current levels, hinges on favorable market conditions continuing.
While State Street's projections boast impressive accuracy, with 90% correctness noted for 2024 forecasts, market fluctuations have posed challenges. For example, during 2022, even as $89 billion flowed through the sector, it couldn't prevent AUM from declining by 11.3% due to the downturns across equities and bonds, according to data from ETFGI, the investment data consultancy. Nevertheless, State Street remains optimistic, projecting increased competition, particularly among active ETFs.
The rise of active ETFs will also usher at least ten new entrants to the market, including passive managers launching active products. The anticipation of innovative routes to market aligns with regulatory support. Recent changes from the Central Bank of Ireland (CBI), which eased restrictions on launching ETF share classes of existing mutual funds, have set the stage for increased engagement within the industry. Ken Shaw, head of ETF solutions, EMEA at State Street, emphasized the surge of interest from active managers, stating, "We have seen a huge amount of interest here. Most of the enquiries are coming from active managers who want to leverage their scale and minimise the financial overheads of launching an ETF."
More actively managed funds are now eager to streamline their operational overheads by potentially outsourcing certain functions to white label service providers. With firms like DWS, Ossiam, and State Street Global Advisors making moves to dominate this sector, this innovation reflects the increasing complexity and competition of the ETF marketplace.
State Street also predicts greater transparency will emerge as the CBI is expected to align with Luxembourg's fewer transparency requirements by year-end, which may lead to the launch of semi-transparent active ETFs. This prospect of semi-transparency marks another exciting chapter for the ETF industry.
Retail participation is projected to be another major growth driver for active ETFs, as ownership rates may rise from 20-25% currently to between 30-35% within the year. The UK has historically lagged behind many European counterparts, with retail adoption at only 8%, yet it’s recognized for rapid growth, presenting new opportunities for stakeholders.
Analyzing broader market trends, investment sentiment reflects mixed emotions, as highlighted by findings from Bank of America (BofA). The financial sector has recently seen fund managers adjusting their portfolios amid fluctuated investor enthusiasm. The bank notes, “Fund cash levels fell to lows last September but have ticked up since,” indicating fluctuated sentiment among investors as some market players reduced equity exposure, resulting in the first pullback for nearly one year.
A disconnect has emerged between institutional and retail sentiments, as bullish advisors are reported from surveys such as GWIM, contrasting with negative retail sentiment reflected by the AAII Bull-Bear spread showing four consecutive weeks of bearish outlook.
The report suggests momentum stocks, which had performed exceptionally well through 2024, are starting to show weaknesses marked by the average Price Momentum factor dropping roughly 4%—a significant change lagging the equal-weighted S&P 500 returns.
Despite recent downturns, sector preferences continue to shift, with communication services gaining momentum as fund managers add exposure over the past two years. Meanwhile, historical lows have been recorded for Information Technology exposures. A notable increase seems observable for Tesla, likely led by institutional ownership following the elections, with the rest of the Magnificent 7 stocks showing limited changes.
The financial and industrial sectors increasingly draw attention from active managers. Yet, BofA warns of concentration risks, as their data suggests portfolios often concentrate over 32% of AUM on just five stocks, indicating potential vulnerabilities even amid broadening market conditions.
Looking forward, the innovations and trends surrounding active ETFs signal not only greater accessibility for investors but also significant shifts within the financial industry. The competitive nature of the ETF market, driven by both active and passive strategies, could lead to transformative changes for investors and issuers alike. The stage is set for 2025 to possibly redefine how Europe engages with active ETFs, establishing them not only as investment instruments but as pivotal components of financial portfolios moving forward.