Active ETFs: An increasingly important part of the investment landscape

  • 31 August 2022 (5 min read)

Actively managed exchange-traded funds (ETF) are further embedding themselves into the investment landscape – something we expect to continue apace given their particular characteristics and the ongoing digitalisation of asset management.

The global ETF market has been on an upward trajectory for some time and consultancy group PwC estimates that it could top $20trn of assets under management by 2026 – a 100% rise on the $10trn recorded in 2021.1

But while the bulk of this market presently consists of passive funds, we believe the potential for growth in active ETFs is huge.

The active market

Active ETFs aim to outperform a benchmark within an ETF wrapper, reflecting a model portfolio rather than an index. They are not new, and have in fact been around since 2008, but are now enjoying growing investor interest.

Active funds now account for 3% of the global ETF market - around $300bn.2 While this is still relatively small, it is double 2019’s tally and according to analyst Morningstar, although active ETFs represent 2% of all active investment funds, they accounted for 35% of active fund inflows in 2021.3

This is impressive growth, and we believe flows into active ETFs should continue; economic uncertainty and volatility continues to trouble markets and under such conditions, we believe investors are more likely to seek out active funds to help them navigate the tricky environment. 

Accessing sustainability and thematic factors

In our view, one of the key attractions of active ETFs is they can give investors access to a variety of key investment themes within an ETF framework – for example, bringing added value in terms of responsible investing capabilities, when they are not constrained by any benchmark.

We also believe that active ETFs targeting sustainability  are a particularly  exciting area, given investors are placing an increasing amount of importance on responsible investing, alongside their financial objectives.

Similarly, thematic active ETFs, which focus on long-term trends such as digitalisation and demographics, are gaining in number, and popularity. A PwC survey found that thematic ETFs, including sustainability focused vehicles, are ranked either first or second in terms of expected investor demand over the next two to three years in all the markets it analysed.4

Liquidity and digitalisation

As well as innovation in the sector, there are other factors driving growth in the active ETF market – trends that we believe will continue.

ETFs can give more flexibility to clients who need it, due to their additional liquidity, and ability to trade intra-day. They are also transparent because in most markets, holdings are published daily.

The market is also benefiting from the long-term trend of increased digitalisation, something we are experiencing in almost every aspect of our daily lives – and in the asset management industry. The emergence of online brokerage platforms, as well as banking disintermediation and blockchain technology, is transforming the way funds are distributed, and we believe the asset management industry’s ongoing digital evolution is another significant growth driver.

We believe ETFs can potentially address many investors’ future needs, and the market trend is clear – active ETFs look set to become an increasingly important part of investors’ portfolios in the coming years.

 

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