Demand For Europe’s Actively Managed Exchange-Traded Funds is Set to Expand
November 12, 2021 — London
Ultrashort-dated fixed-income strategies are proving especially popular
Demand for European actively managed exchange-traded funds (ETFs) is set to grow, with institutional investors driving demand, according to the latest issue of The Cerulli Edge―Global Edition.
“Institutional investors—including pension funds, insurers, sovereign wealth funds, and nonprofits—are likely to be the main drivers of new business for actively managed ETFs in the short term,” says Justina Deveikyte, director of European institutional research at Cerulli Associates.
Although actively managed ETFs are still only a small part of the overall ETF market, they have gained a decent share of new flows this year as investors braced themselves for interest rate rises and cheaper alternatives to active mutual fund strategies.
The assets under management (AUM) of European actively managed ETFs increased by €3 billion (US$3.5 billion) during the first six months of 2021 to reach €15.8 billion at the end of June, according to Morningstar data. The number of actively managed ETFs rose by two to 49 in the first six months of this year.
Compared to the U.S., there are relatively few active ETFs in the European marketplace, but those that have proved popular with investors this year include ultrashort-dated fixed-income strategies.
Actively managed ETFs combine the benefits of a well-diversified portfolio with the advantages of an ETF wrapper, including trading flexibility and cost efficiency. To provide investors with a wider range of options, ETF managers are launching ETFs that offer the same strategies as their traditional mutual funds.
Deveikyte notes that the quality of the underlying active strategy may be more important than the size of the manager when it comes to determining success. “Smaller managers are applying their in-house expertise in active management and knowledge to ETF strategies. This can help them gain assets across the fixed-income market and in areas such as environmental, social, and governance (ESG) investing in the equity market,” she says.
Over the next 12 to 24 months, Swiss and U.K. issuers are the most optimistic about the growth of active ETF assets, with 15% predicting growth in excess of 10%. In contrast, only 5% of Spanish issuers expect such high levels of growth. One in six Spanish issuers predicted that this segment of the ETF market would not show any expansion and their counterparts in France and Italy were almost equally pessimistic.
- In Asia, institutional investors are making greater use of ETFs for diversification, risk mitigation, and liquidity. Underperformance by actives and efforts to cut costs are also driving ETF growth. Many institutional investors are, however, unsure of how best to implement ETFs in their portfolios, creating opportunities for fund managers to add value.
- In the U.S.’s ultra-competitive ETF marketplace, issuers are having to do more than ever to stand out, as the surge in the number of niche and thematic ETF launches in 2021 shows. These products are often rules-based strategies and have far-ranging themes, including ESG, artificial intelligence, and social media.
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