Active exchange-traded funds (ETFs) are beginning to carve out their place in the investment world, historically overshadowed by their passive counterparts. Currently, they make up only 8% of the global ETF market and just 3% within Europe. Despite these small figures, recent developments suggest there’s growing momentum behind active ETFs, with several prominent asset managers launching new products aimed at grabbing investor attention.
Just this past month, asset managers such as Jupiter, Avantis, and Robeco have entered the fray with new active ETF offerings. For example, Jupiter’s new active global government bond ETF, managed by Vikram Aggarwal, aims to capitalize on mispricing within the sovereign bond market. This ETF has been introduced through a partnership with HANetf, showcasing the potential collaborative efforts among firms to promote active strategies.
Robeco isn't standing still, having launched four active ETFs late last year, with plans to introduce more, particularly focused on the growing demand for products geared toward the burgeoning markets. Meanwhile, Avantis has made headlines with the release of its three new active ETFs, including the Avantis Global Small Cap Value UCITS ETF, which is now accessible within the UK market.
Further emphasizing this trend, recent findings by Fidelity International reveal shifting preferences among professional investors. Their “Professional Investor DNA Survey” shows increased favorability toward active ETFs, indicating substantial growth as the active ETF market surged from $38 billion to $64 billion over the past year. Notably, 61% of intermediaries and distributors expressed intentions to amplify their active ETF allocations.
Kenneth Lamont, Morningstar's strategist, predicted this rise, commenting, “Trailblazers such as JP Morgan have been joined by traditionally active investors... Expect more entrants in 2025.” This prediction aligns with the growing recognition of active ETFs as investors divert their focus from the traditional actively managed mutual funds they have often found lacking.
One of the primary motivations for the push toward active ETFs is investor discontent with the high costs and variable performance seen with many active funds. Increasingly, investors are opting for lower-cost passive products. Active ETFs, with their hybrid structure, offer compelling features. Fidelity's research stated most investors seek active ETFs for isolative alpha generation and ease of use, highlighting their tangible attractions among investors.
Alastair Baillie Strong, Fidelity International’s global head of ETFs, emphasized these benefits, stating, “They are very risk-controlled and investors understand what they get... relative to a market cap benchmark.” He noted the emergence of 'enhanced core' strategies enabling investors to achieve excess returns through stock selection or targeted alpha sources, which is pivotal for those seeking more than typical index-linked returns.
There’s also concern about confusing the nature of active ETFs, particularly highlighted by Matthew Dubin, portfolio manager at Avantis Investors. He stated, “Investors don’t necessarily know what they’re getting. Value is defined by four variables, quality by ten.” This hints at the difficulty investors face when assessing fund categories, as different funds offering ostensibly similar styles can show disparate results.
This distinction is particularly stark when comparing indices. The S&P 500 Value and MSCI USA Value indices have shown annualized return discrepancies of 2.2% from 2009 to 2023, showcasing the unpredictable returns across various fund categories. With smaller companies, these differences can widen even more significantly.
Yet, as momentum continues to build for active ETFs, recovery remains difficult to predict due to tax structure disparities. Morningstar's Kenneth Lamont remained skeptical, remarking on the larger hesitation within the European market compared to the advantages witnessed within the U.S. This skepticism is largely rooted where active ETFs, though offering substantial flexibility, do not currently capture the tax benefits seen across the Atlantic.
Last week, on February 4, 2025, Cohen & Steers jumped on the trend by launching its first three active ETFs, marking the company's entrance as historically the oldest investment manager primarily focused on listed REITs and real assets. The funds launched—Cohen & Steers Real Estate Active ETF, Cohen & Steers Preferred & Income Opportunities Active ETF, and Cohen & Steers Natural Resources Active ETF—reflect the increasing significance of active ETFs within niche markets, like real estate.
While there remain some active ETFs closely mirroring traditional actively managed REIT mutual funds, others leverage unique strategies to meet the changing preferences of today’s investors. These products allow access to specific areas of the REIT market, maintaining competitiveness within the broader index-linked environment by providing noteworthy tax efficiencies and leading design strategies.
Overall, the active ETF market is witnessing significant transformations, shaped by shifting trends and demands, as asset managers respond creatively to investor needs. Whether this momentum can sustain itself and lead to meaningful market share growth remains to be seen, especially as active managers face increasingly challenging years, demonstrated by Trustnet research indicating low information ratios at their weakest points.
This story, showcasing the dynamic circumstances surrounding active ETFs, highlights not only the opportunities presented within this space but also the complications spilling from broader organizational trends and structural market behaviors.