European investors have shown increased appetite for active exchange-traded funds. 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, according to data from Morningstar.
And there is much room for growth. Active ETF assets currently account for just 1.2% of the €1.3 trillion European ETF market. “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 of European asset and wealth management research at Cerulli Associates.
Flows into active ETFs in Europe have slowed this year amid market uncertainty and weaker economic conditions. 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, according to Cerulli.
“Active ETF strategies are particularly well suited to helping investors build out the ‘strategic core’ of their portfolios,” says 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,” Zumbo notes.
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-labelled 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.
Some challenges remain. Active ETFs’ requirement for full daily portfolio disclosure could hamper the rollout 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.
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