Actively managed exchange traded funds combine the advantages of ETFs with active management, aiming to outperform benchmarks through expert stock selection and/or to provide unique portfolio exposures.
Following their rise in the US, European investors and asset managers have begun to embrace the active ETF structure since the late 2010s, recognising their advantages.
The regulatory landscape in Europe, including the implementation of Mifid II — which aims to increase market transparency — provides a strong investment framework for the ETF market.
Mifid II spurred greater demand for transparent and cost-effective investment products, paving the way for ETFs to gain traction among both retail and institutional investors.
As a result, the landscape of active ETFs in Europe is favourable, with European investors and asset managers alike leveraging the structure to build new and unique active strategies. This evolution underscores a global appeal for active ETFs.
Differ from passives
ETFs emerged as a revolutionary financial instrument in the early 1990s, with the introduction of the first ETF in the US, the Standard & Poor’s Depositary Receipts, commonly known as the “spider”, in 1993.
This new innovation allowed investors to buy and sell shares of a fund that closely mimicked the performance of the S&P 500 index, combining the benefits of diversification characteristics of open-ended funds with the flexibility of daily exchange liquidity and trading.
The sponsors of popular benchmarks such as the S&P 500 and the Nasdaq 100 index have shifted gradually from equity market benchmarking to passive ETF product licensing over the past 20 years.
As the passive ETF market has swelled in assets under management, it has led to an array of products spanning the asset classes, including equities, bonds and international markets, as well as sector, smart beta and thematic funds.
Many of these strategies were more traditionally captured in active open-ended fund wrappers, and the creation of passive ETFs to capture these strategies led to a shift in vehicle adoption. As assets moved from active stock selection traditionally offered via open-ended funds to equity market benchmarking captured in passive ETFs, what once was a reference measure of the health of the market became the market itself.
More recently, the advent of active ETFs marked a significant development in the ETF landscape, expanding the realm of ETFs beyond their traditional passive roots.
While ETFs have historically been synonymous with tracking benchmarks, the launch of the first actively managed ETFs in the late 2000s introduced a new dimension, combining the advantages of ETF transparency and daily exchange liquidity with the power of active management.
Unlike their passive counterparts, active ETFs were (and still are) managed by a team of experienced portfolio managers whose job is to make discretionary investment decisions on stock selection, with the objective of outperforming a benchmark or the broader market, or to provide a unique, benchmark-agnostic exposure.
