Active ETFs have taken the US by storm, Europe will soon follow suit

Active ETFs have taken the US by storm, accounting for half of US ETF launches in 2021 [1]. Many European asset managers expect increased demand for active ETFs in Europe. However, this demand is not being satisfied due to legacy regulation requiring daily holding disclosure [2]...

Relaxation of these disclosure rules could provide a catalyst for active ETF expansion in Europe. [3]
20% of all enquiries to HANetf on launching white label ETFs are active strategies

The earliest exchange-traded funds (ETF) passively tracked an index much like traditional investment funds. [4] As a result, ETFs and passive investment become somewhat synonymous. [5] That, however, is changing. Investors are increasingly realizing that ETFs are just a wrapper. [6]

In the United States, there has been a boom in actively managed ETFs. Over half of the nearly 500 ETFs that launched in the US in 2021 were actively managed, according to data from Morningstar Direct. [7] US active ETFs/ETPs gathered net inflows of $102bn in 2021, nearly double the $59.8bn gathered in 2020 according to ETFGI. [8] At the same time, several active mutual funds have been converted into active ETFs. Many traditional US mutual fund managers now have an ETF offering.

However, while the boom in active ETFs has taken off in the US, legacy regulations are holding back growth across the Atlantic. Indeed, active ETFs in Europe is still tiny, accounting little over 1% of European ETF assets under management in September 2021. [9]

The growth of active ETFs in the US has been driven by US regulation changes. In 2019, US regulators relaxed daily portfolio disclosure requirements. Similarly, Canada does not require daily portfolio disclosure for active ETFs, driving active ETF AUM to account for 20% of all ETF AUM, according to PWC.

In contrast, European regulations still require ETFs to disclose full daily holdings. This makes the ETF wrapper unattractive for active managers who may be concerned about being “front run” if the positions they are building are revealed on a daily basis. [10]

However, there is clearly demand for active ETFs among asset managers. According to a recent PWC survey of asset managers, 25% of respondents in 2021 said they expect significant demand for active ETFs in their region in the next 2-3 years. That increased from 14% in 2020.

That demand, however, may fail to be satisfied with European regulators updating their regulations. That is, unless regulators in Europe decide to take a fresh look at the current rules. As PWC notes: “Relaxation of these disclosure rules could provide a catalyst for active ETF expansion in Europe.”

Commenting on the growth of active ETFs, Hector McNeil, co-CEO and co-founder of HANetf said: “At HANetf we believe that ETFs are simply a wrapper and should not be defined by the strategy they follow. ETFs are just better ‘tech’ – the iPhone to the mutual fund’s landline. In our view, in 15 years time all new funds will be ETFs that can be traded throughout the day and any remaining mutual funds will need to look and feel more like ETFs in order to survive and retain legacy assets.

While the regulations may mean some fund issuers shying away from active ETFs due to current regulations, it does not mean actively managed ETFs are impossible to launch. We currently have two actively managed ETFs at HANetf in partnership with Saturna. Since we launched HANetf, over 3 years ago, around 20% of white label ETF enquiries have been for active strategies. We have had over 900 enquiries since we first launched. ”

Next Finance , February 2022


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