European investors’ appetite for active exchange-traded funds (ETFs) is growing as the usefulness of these tools in portfolio management gains wider recognition. However, concerns and barriers remain, according to the September 2022 issue of The Cerulli Edge―Global Edition.

Assets held in active ETFs in Europe have more than doubled since 2018, rising from €7.4 billion (US$7.3 billion) to €16.0 billion at the end of July 2022.¹Active ETF assets account for just 1.2% of the €1.3 trillion European ETF market, which suggests opportunity for growth.

“There are indications that investors in Europe are starting to look more closely at active ETFs, as they can offer the best of both the passive and the active worlds,” says Fabrizio Zumbo, director, European asset and wealth management research at Cerulli.

Nevertheless, in the short term, market uncertainty and weaker economic conditions have seen flows into active ETFs in Europe slow this year. In addition, the war in Ukraine and the increasing likelihood of recession in the region may leave active ETF strategies at a disadvantage in terms of accessing commodity, venture assets, or unlisted opportunities.

“Active ETF strategies are particularly well suited to helping investors build out the ‘strategic core’ of their portfolios,” continues Zumbo, “and some of the biggest names in mutual fund management have entered the European space in the past few years in a bid to find a more appealing ‘differentiation’ to their value propositions.”

Cerulli analysis of Morningstar data shows that fixed-income strategies represent the majority of assets in active ETFs, accounting for 61% of the total assets under management. Equity strategies make up 27% and money market products represent 10%.

“Fixed-income active ETFs could see further growth, particularly given that liquidity concerns during the coronavirus pandemic proved unfounded, with the structure holding up well during the sell-off that initially hit markets,” says Zumbo.

The ongoing trends in Europe toward more sustainable strategies and a greater focus on environmental, social, and governance (ESG) are also significantly influencing flows. ESG-labeled products are among the biggest active ETFs in the region, such as the €765 million JPM Global Research Enhanced Equity ESG ETF and the €864.1 million Ossiam ESG Shiller BarclaysCAPE US Sector ETF.

However, some challenges remain. Active ETFs’ requirement for full daily portfolio disclosure could hamper the roll-out of active non-transparent ETFs, which report on a monthly or even quarterly basis. In addition, active ETF providers will need to boost their financial education efforts and launch marketing campaigns to improve retail investors’ understanding of the benefits of such products.

Nonetheless, Cerulli believes that as investors in Europe build a greater understanding of active ETFs, the product range will widen, helping to fuel further growth in the space.

Other Findings:

• In the U.S., Cerulli research shows that demand for asset allocation model portfolios from broker/dealer home offices and individual advisory practices is beginning to increase. Model providers that can meet that demand have an opportunity to build sticky relationships with these clients.

• The rapid growth of Singapore’s and Hong Kong’s high-net-worth segments is fueling a surge in the number of family offices in these markets, providing long-term opportunities for asset managers, says Cerulli. However, it is becoming increasingly competitive to onboard funds with private banks, so managers should look to specialize in certain niche areas.

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¹ Source: Morningstar