The launches are flagged with the filing of the Palmer Square EUR CLO Senior Debt Index ETF, focused on EUR and USD denominated AAA and AA CLO debt.  The ETFs will include an active multi-strategy ETF providing similar exposure to PSQO, the NYSE-listed ETF currently offered in the US by Palmer Square.

“The launch of these ETFs in Europe underscores our commitment to delivering cutting-edge solutions in complex investment environments across the globe. It is a natural extension of our global expertise in structured credit and demonstrates our ability to meet the rising market demand,” says Angie Long, Chief Investment Officer and Portfolio Manager at Palmer Square Capital. “Leveraging our proprietary benchmarks trusted by institutions worldwide, these new products offer efficient access to a unique and compelling asset class, affirming our commitment to creating value for institutional and professional investors.”

The firm writes that these ETFs will offer capital preservation by targeting cycle-resilient assets with zero historical defaults, including an actively managed multi-asset credit allocation product offering a single-manager solution to simplify portfolio construction and provide enhanced access to the best relative value opportunities across corporate and structured credit.

 The passive products will create investable access to Palmer Square’s deep understanding and research within the senior tranches of the CLO market, the firm says.

“Institutional appetite for our proprietary European CLO indices and debt products further underscores the demand for these innovative ETFs. Our ability to manage and develop these products entirely in-house ensures operational independence and best-in-class execution,” says Taylor Moore, Managing Director and Portfolio Manager.

Trading commenced in both Euro and Sterling currencies, offering access to AAA-rated, floating-rate CLO notes. Fair Oaks initially listed the CLO ETF on Deutsche Börse Xetra on Sept. 11.

Fair Oaks AAA CLO ETF (FAAA) invests 100 per cent in AAA-rated CLOs, based on Fair Oaks’ established investment processes. It is managed by a team of six professionals, supported by the broader Fair Oaks credit team and led by Miguel Ramos Fuentenebro and Roger Coyle, co-founders and partners of the firm.

The target market for the ETF is European institutional and informed investors. The total expense ratio for the Fair Oaks AAA CLO ETF is 0.35 per cent. All assets are compliant with EU and UK securitisation (risk-retention) regulations – a requirement for EU and UK ‘institutional investors’ as defined in those regulations.

FAAA was launched on the Alpha UCITS fund platform as an additional listed share class of an existing Fair Oaks UCITS fund, the Fair Oaks AAA CLO Fund (the Fund). The Fund was launched with Alpha UCITS in 2019 and has over EUR150 million in assets under management (AUM) as of August 31, 2024. The ETF share class offers investors access to the existing high-quality, diversified portfolio. FAAA is a long-only portfolio with no leverage and is classified as Article 8 under the EU Sustainable Finance Disclosure Regulation (SFDR).

Ramos Fuentenebro says: “We’re pleased with the initial reception to the Fair Oaks AAA CLO ETF. For the first time, European ETF investors now have efficient access to AAA-rated CLOs, an asset class that has a record of no historical defaults and an attractive yield.”

“CLO ETFs have been tremendously successful in the U.S. as they offer investors a unique high quality, floating rate, short duration asset. The new London listing offers UK and European investors access to 100 per cent AAA-rated CLOs in an ETF wrapper for the first time in Euros and British pounds,” says Stephane Diederich, CEO of the Alpha UCITS fund platform.

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 international energy services company had 8.69 per cent of its stocks held short by five investment firms, with Astaris Capital Management LLP holding the largest position at 2.51 per cent.

Diversified Energy Company was the second most shorted company with 7.84 per cent of its stocks held short by eight fund managers. This was followed by Ocado Group and Burberry Group with 6.18 per cent and 6.06 per cent of the retailers’ stock held short by five and four fund managers, respectively.

The analysis also revealed GLG Partners LP held the highest number of short positions on UK listed companies of any investment firms, with 40 active shorts. This was followed by Marshall Wace LLP, which held 32 active short positions.

Will Rhind, Founder and CEO of GraniteShares, says: “Energy and retail firms are seen as areas where share price weakness is creating the chance for investors to bet against firms with Petrofac the most shorted stock in the UK along with Ocado, Burberry and Kingfisher.”

“Shorting has long been a powerful tool in the arsenal of institutional investors, but we have seen a rise in retail traders using short ETPs like ours to explore market opportunities. While some retreat to the sidelines, sophisticated investors see opportunity to increase their exposure and potential returns through leverage, and hedge against long positions.”

Other highlights from the report include:

Recent inflows and the rising gold price pushed global gold ETFs’ total AUM to USD246 billion, a month-end peak. Collective holdings rebounded to 3,154t, the highest since January

Trading volumes rose across the board in July with exchange-traded derivatives leading the rebound, and growing prospects of major central banks delivering rate cuts ahead pushed up COMEX gold future net longs to a multi-year month-end high.

For BI, ESG debt remains a bright spot and could expand to 1.8 per cent of total issuance, led by green bonds. In contrast, ESG ETFs face a mixed outlook, though BI projects ESG will marginally increase its share of ETFs.

ESG AUM to hit USD40 trillion by 2030

Adeline Diab, BI Director of Research & Chief ESG Strategist, says: “ESG assets have been resilient despite economic uncertainty, reaching USD30 trillion in 2022 according to the GSIA. Cutting through the polarization engendered by elections, we expect the market to mature and gain credibility, crossing USD40 trillion by 2030, with more harmonized regulations and investor scrutiny on sustainability claims.

“We project a lower 3.5 per cent CAGR vs. 12 per cent in 2016-20 when an ESG “gold rush” was accompanied by pervasive greenwashing. Europe may keep pace, backed by institutional demand, while Australia and New Zealand could expand faster as ESG gains traction. In contrast, US growth may fall due to market concentration and the backlash. As the market consolidates, emerging themes and robust demand should propel growth, with the BI ESG Market Navigator suggesting 85 per cent of investors plan to increase ESG AUM.”

According to the BI report, Europe’s 45 per cent share of ESG assets makes it the largest market and it is set to remain on top as BI expects its growth to keep pace with the global rate. US ESG assets were halved in 2022 to USD8 trillion, just over 25 per cent of the market, after the GSIA’s decision to exclude investments with vague ESG standards, and its share may reduce further based on BI’s slower growth projection.

Japan, Canada and Australia are small but fast-growing markets. Japan’s 50 per cent expansion to USD4.3 trillion in 2020-22 boosted its global share to 14 per cent. Though these countries may continue to outstrip the global expansion, BI expects their CAGRs to stabilise at 6 per cent as regulation and mounting scrutiny drive market consolidation.

ESG debt issuance is set to continue growing at a moderate pace despite macro uncertainty, while green bonds remain dominant. In the last decade, ESG debt’s 40 per cent CAGR outpaced the overall market’s 6 per cent rate and BI forecasts ESG debt at 1.8 per cent of total issuance in 2030, following a surge from 0.4 per cent to 1.5 per cent since 2019 despite inflation and higher interest rates in the last two years.

USD665 billion ESG ETFs to accelerate to 6 per cent ETF AUM share by 2030

ESG ETFs worth USD665 billion in AUM have stabilised at about 5 per cent of global ETF assets, following a surge from just 2 per cent in 2019, adds BI.

Adeline Diab, BI Director of Research & Chief ESG Strategist, says: “We expect the ESG share to embark on an incremental growth trajectory, reaching 6 per cent by 2030 before levelling off. Our forecast is based on ESG ETFs’ current 20 per cent annualised growth rate vs. 15 per cent for the overall ETF market and assumes that the former will gradually slow down to be in line with the overall ETF market by 2030 as investor demand remains robust while stronger global regulation may boost credibility even though it may slow the pace of new product launches.

“EMEA makes up 70 per cent of ESG ETFs’ USD665 billion in assets, followed by the Americas with an almost 20 per cent share by geo-focus. Higher growth in the fast-expanding APAC and Japan regions could bring their share toward 15 per cent in 2030 from 10 per cent in 2024.”

The association writes that the newly launched classification framework offers investment firms a tool to better communicate index-based products to clients by describing index-based strategies according to their level of active decision making. It proposes a framework of indexing along a spectrum of strategies beyond traditional market capitalisation weighting.

The framework is based upon three dimensions of strategy, sources of returns, and level of discretion, with the goal of increasing transparency among index-based investment products.

 Accompanying policy recommendations emphasise the importance of transparency and clear disclosures around the active investment decisions involved in index-based products.

Rhodri Preece, CFA, Senior Head of Research, CFA Institute says: “The notion of a simple bifurcation between active and passive investment products is outdated. Index-based strategies are varied in their design features and involve different layers of active decision-making, dispelling the historical distinction between active and passive management. As index-based products have proliferated, incorporating more complex features than market capitalization weighting, there is a need for greater transparency and improved investor comprehension of these strategies. This new framework intends to support investment advisers and end-investors through clearer disclosure and communication of the key features of index-based products.”

The research includes recommendations for investment firms grounded in the principles of improved disclosures for clients, including:

 Educate and inform investors of the active decisions made throughout the investment process for index-based investments. 

Communicate to investors about the decision-making processes involved in index fund creation, including security selection and weighting methodologies used in the creation of the investment product or strategy.

Provide prospective clients with access to more detailed information on index product features as part of the pre-sale product literature.

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.

Its study with organisations already invested in the sector found 77 per cent expect the flow of funds into bitcoin ETFs to increase over the next 12 months with 13 per cent predicting dramatic increases.

The institutional investors and wealth managers questioned in the US, UK, Germany, Switzerland, Singapore, Brazil and the United Arab Emirates who collectively manage around USD1.7 trillion in assets agree the mainstream adoption of crypto ETFs will have wider and more profound impacts on the sector.

The firm writes that bitcoin ETFs are seen as delivering a range of benefits including lower costs, increased liquidity within established regulatory frameworks and reporting as well as enabling institutional investors to avoid the complexities and risks associated with self-custody.

Institutional investors and wealth managers questioned all agreed that the widespread adoption of bitcoin ETFs is putting pressure on regulators to put comprehensive regulatory frameworks and standardised definitions and classifications in place with 29 per cent strongly agreeing.

However, the research shows arbitrage-focused hedge funds are regarded as the most attractive way for investors to gain exposure to digital assets ahead of ETFs or ETPs.

The latter, in turn, are seen as more attractive than a passively held diversified portfolio of digital assets or an actively managed diversified long-only portfolio of digital assets. The approach rated fifth in the research was an actively managed diversified long/short portfolio of digital assets.

Anatoly Crachilov, CEO and Founding Partner at Nickel Digital, says: “The wider implications of the launch of crypto ETFs are that they helped legitimise the asset class, driving interest to both directional products such as ETFs, as well as the more sophisticated market-neutral strategies via specialised active managers.”

Manganiello’s view follows reports that BlackRock’s spot bitcoin ETF has accumulated USD16.7 billion of assets since it launched in January 2024, and the news that more and more cryptocurrency ETFs are also due to enter the market, with the Ether ETF set to gain final approval from the US’ Securities and Exchange Commission (SEC) this summer.

LIAN Group writes that it is an investment firm that builds and funds companies across multiple industries, including digital infrastructure, AI, cryptocurrency and blockchain. Since launch, they have deployed over USD500 million of invested capital. One company they have built is Cowa, a European blockchain infrastructure company running on renewable energy.

Manganiello, who also serves as a professor of blockchain technologies at Geneva Business School, believes these regulatory greenlights will soon lead institutional investors, such as hedge funds and pension funds, to view cryptocurrency as a viable asset. For Manganiello, it’s only a matter of time until these institutional players muscle into the crypto market, which has traditionally been dominated by retail investors.

Manganiello says: “Crypto ETFs have been given the regulatory green light and, for an asset that has long been considered volatile and novel, it’s a big step. Crypto is beginning to prove the critics wrong; it’s been given regulatory legitimacy.

“I won’t deny that crypto has traditionally been seen as a retail market. But, with BlackRock stepping in and growing its own spot ETF so quickly, it won’t be long until other institutions take the leap and invest in crypto. The Ether ETF approval will only be a catalyst.

“Crypto can be highly profitable – and institutional investors will definitely look to take advantage of it as they look to diversify their assets. That’s why I think by the end of next year we’ll see crypto ETFs form a decent chunk, and at least 5 per cent, of hedge fund and pension fund portfolios.

“At the end of the day, it’s incredibly important for institutional investors to stay ahead of the curve. They have to adopt what I’d call a “millennial savviness”, an approach that embraces emerging, innovative alternative investments – and isn’t bogged down with preserving the status quo. With crypto, it’s no different; institutional investors, like hedge funds and pension funds, have to be ready to consider crypto as an asset – and especially with crypto ETFs quickly gaining approval.”