Carne Group believes the European active ETF sector will see accelerated growth due to improved market efficiency – driven by an evolving regulatory environment, investor demand and  more product launches and managers entering the sector. 

Patrick O’Brien, Managing Director, Business Development at Carne Group, says: “Active ETFs will increasingly become an option for managers to increase investor choice and product range and the changing regulatory environment is enabling them to enter the ETF sector, which is dominated by passive funds.”

Carne Group says growth in the active ETF market will be supported by an increasing number of leading asset managers including Robeco, iShares, Eurizon Capital, ARK Invest and others launching active ETFs in Europe or planning to do so and potentially a more favourable regulatory environment.

The UCITS eligible assets directive, issued by the European Securities and Markets Authority (ESMA) on 7th May 2024 could broaden the active ETF sector, the firm says

Globally, actively managed strategies are playing a bigger role in the ETF market. During the first half of 2024, they attracted 25 per cent of flows and achieved 20 per cent organic growth rate, with assets growing to a record USD889 billion, up from USD714 billion at the start of the year.

In 2022, active ETFs in Europe made up 3 per cent of ETFs flows versus 1.5 per cent of AUM.  In 2023, the corresponding figures are 5 per cent and 1.8 per cent.

Research from Carne Group shows institutional investors plan to boost allocations to ETFs as the sector is increasingly regarded as part of their core holdings.  The study with wealth managers and institutional investors including pension funds, insurers and family offices who collectively have USD1.7 trillion in assets under management, found more than four out of five (84 per cent) expect to have 5 per cent or more of investment assets in ETFs within three years. Around a third (32 per cent) expect to have more than 7 per cent.

The firm writes that would represent dramatic growth – currently around two-thirds (67 per cent) of the investors questioned estimate they have less than 5 per cent of investment assets in ETFs. The predicted growth reflects the switch in institutional views of ETFs – almost all (97 per cent) questioned say ETFs are used as core holdings rather than for short-term allocation.

In a similar Carne study of institutional investors, around half (48 per cent) questioned expect the global ETF sector to be worth USD14 trillion or more within four years compared with USD10.212 trillion in June last year.

Its research shows institutional investors say the key attraction of ETFs is that they provide access to hard to access asset classes followed by their ability to make it easier to gain concentrated access to specific asset classes. The high degree of innovation they offer as well as their lower charges compared with other structures are also seen as important benefits.

Patrick O’Brien says: “Institutional investors are looking to increase allocations to ETFs over the next three years as our research shows, with ETFs firmly established as a core holding rather than a short-term allocation tool. More active ETFs will lead to more choice. This will further increase investors’ holdings in ETFs as part of their core investments and that trend will be supported by more managers entering the space and opening up new distribution channels.”   

The firm writes that active ETFs are providing investors with the potential to unlock more value and opportunities by accessing new strategies and markets. 

A new BlackRock paper, “Decoding Active ETFs: How the growth of active ETFs is unlocking innovation and opportunity for investors” outlines three key developments driving active ETF innovation and adoption, including US regulatory changes, the growth of fee-based advisory and model portfolios, and the rise of individual investors.  

US regulatory changes: The 2019 ETF Rule streamlined processes, created a consistent framework, and added additional flexibility for issuers to launch and manage active ETFs. It also lowered barriers to entry for new ETFs, resulting in a flood of new entrants and more complex strategies within the US ETF landscape.

Of the more than 1,300 US-listed active ETFs, 1,100 of them were listed after adoption of the ETF rule.

In the years since this regulatory unlock, active ETF assets under management in the US have surged from about USD100 billion in 2019 to USD693 billion as of June 2024.

Growth of fee-based advisory and model portfolios: BlackRock writes that fee based advisers are increasingly using active ETFs as building blocks for model portfolios, with registered investment advisors accounting for nearly 41 per cent of all assets, up from 31 per cent in 2019.

The percentage of models holding at least one active ETF rose from 20 per cent in 2021 to nearly 32 per cent through 2023, while allocations for those advisors holding at least one active ETF, on average, increased from 12 per cent to almost 18 per cent.

Rise of self-directed investors through online brokerage platforms: The shift to commission-free trading by digital wealth platforms in 2019 has prompted more people to invest their own money to save for retirement or to meet other financial goals.

Individual investors have increased their exposures to active ETFs, going from USD9 billion AUM in 2019 to USD55.9 billion through March 2024.

BlackRock’s expectations for growth underscore how active ETFs are at the nexus of innovation within the industry, accounting for 76 per cent of all US-listed ETF launches in 2023, and 43 per cent of global ETF launches.