Member Update

The rise of active ETFs – An opportunity for boutiques?

With boutique asset managers increasingly targeting a wider investor demographic – including US retail and wholesale clients – many are attempting to do so by launching new fund products, including active exchange traded funds (ETFs). So what are they?

In contrast to passive ETFs which simply track an underlying index, active ETFs are – as you would expect – actively managed. The number of active ETFs in the market has increased dramatically. According to Morningstar data, 60% of the 500 ETFs which launched in the US last year were actively managed, making it the first year in which the number of active ETF launches exceeded passives.[1] However, active ETFs are still a relatively small proportion of the overall $7 trillion US ETF market,  accounting for 4% of assets and 10.5% of net sales, notes Morningstar. [2]

Nonetheless, several high-profile active managers did launch their first-ever ETFs including BNY Mellon and Nuveen, while a number of firms – such as JP Morgan Asset Management and Dimensional Fund Advisors – have converted some of their existing mutual fund structures into active ETFs.

So what is driving this activity? Previously, active ETFs were subject to stringent transparency requirements obliging them to disclose their holdings on a daily basis, but the provisions have since been relaxed, which has made these wrappers more appealing to traditional fund managers.

The US Securities and Exchange Commission (SEC), for instance, has allowed certain active ETFs – otherwise known as semi-transparent ETFs or non-transparent ETFs – to be less open about their holdings. Although less transparency is normally a bad thing, the SEC’s decision is actually quite sensible, as it helps managers of active ETFs safeguard proprietary trading information.

There are other factors facilitating the growth in active ETFs. Increasingly, active managers are facing stern competition from passive products, which charge significantly lower fees, and have been effective in attracting investment from both retail and institutional allocators. This is prompting managers to trial active ETFs as part of their wider offering.

Additionally, ETFs in the US confer on investors a number of tax benefits, which are not available through traditional funds. This is another advantage which has been onboarded by fund managers.

For boutiques looking to accumulate capital from US investors, active ETFs are much cheaper to run, at least relative to a conventional ’40 Act Fund, according to one IIMI member. He continues ’40 Act funds are largely out of reach for smaller boutiques, adding that active ETFs could be a more efficient way for managers to attract US mandates.

As boutiques increasingly attempt to diversify both their returns and sources of investor capital, a number of them may see some virtue in establishing active ETFs, especially if they want to conquer the US market.   

[1] Financial Times – December 31, 2021 – Debut in active ETFs surge as US investors’ appetite grows

[2] Financial Times – December 31, 2021 – Debut in active ETFs surge as US investors’ appetite grows