Active ETFs are gaining momentum globally, with the US leading the charge, according to data.
Morningstar data has revealed that by March 2024, actively managed ETFs accounted for 8.5% of the US ETF market, while actively managed mutual funds experienced outflows. In contrast, Europe is slowly embracing this trend, with active ETFs making up just 1.9% of the region’s total ETF assets.
Bryan Armour, director of passive strategies research at Morningstar, attributed the US growth to investors’ increasing preference for low-cost ETFs and the flexibility asset managers gained after the SEC’s 2019 “ETF Rule.” However, he cautioned that while ETFs offer growth opportunities for managers, they also introduce nuances that investors must grasp to navigate actively managed portfolios effectively.
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In the US, active ETFs have proliferated in recent years but still represent a small segment, accounting for 8.5% of the ETF market and 4% of the active fund market. Active equity ETFs have gained traction, overshadowing fixed income, while multi-asset ETFs remain sparse due to mutual funds’ and CITs’ prevalence in retirement plans.
Morningstar analysts emphasised the importance of strategy capacity in the ETF structure and recommend focusing on ETFs holding liquid securities and diversified portfolios. They also cautioned investors about trading illiquid ETFs, advising patience to benefit from established track records.
In Europe, Monika Calay, director of manager research at Morningstar, noted exponential growth in active ETF assets. Since March, European investors have amassed approximately EUR 33.8 billion in assets. While bond strategies initially drove growth due to low-interest rates, equity active ETFs have gained significant momentum, accumulating over EUR 20 billion in the past two years.
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The research on the European market also reflected a shift towards cost efficiency, with the asset-weighted representative cost decreasing from 0.41% in 2013 to 0.27% in 2024. However, most European active ETFs are “shy-active,” offering lower active share and tracking error than similar open-end funds. As such, Morningstar advises investors to moderate excess return expectations from these products.
Overall, while active ETFs offer promising growth prospects globally, understanding their complexities remains crucial for investors.
