The Rise of Active ETFs: A Game Changer in the Investment Landscape

In collaboration with Ahmed Khelifa, CFA

The investment world is undergoing a significant transformation with the rise of Active Exchange-Traded Funds (ETFs). Historically dominated by passive index-linked ETFs, the market is now increasingly shifting towards active ETFs as investors seek more tailored and dynamic investment strategies. This change is not merely a passing trend but a fundamental shift, driven by evolving investor demands, regulatory support, and the pursuit of higher returns.

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The Growing Popularity of Active ETFs

Active ETFs are rapidly gaining traction in financial markets. In 2023, they accounted for 100% of net inflows into equity funds, while mutual funds and indexed ETFs experienced outflows (Source: Morningstar - Dec 2023). This striking shift highlights the growing confidence in active management within the ETF structure. Unlike passive ETFs, which track a specific index, active ETFs are managed by professional fund managers who make decisions based on market conditions, aiming to outperform the index.

The global market for active ETFs has witnessed impressive growth. In 2024, assets under management (AUM) for active ETFs are expected to grow by 20% year-to-date【Source: ETFGI – June 2024】. Moreover, professional investors are increasingly favouring active ETFs, with 78% planning to increase their exposure to these funds over the next 12 months, often at the expense of traditional funds【Source: 2024 Global ETF Investor Survey BBH】.

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France’s Emerging Role in the Active ETF Market

France is quickly positioning itself as a key player in the European active ETF market. This rise has been supported by significant regulatory changes. The French government recently lifted the ban on active ETFs from the French stock exchange with Decree 2024-151, allowing these funds to be issued and traded locally【Decree 2024-151 of 27 February 2024, amending Articles D. 214-22-1 and D. 214-32-31 of the Monetary and Financial Code】. Additionally, the French Financial Markets Authority (AMF) introduced new guidelines, permitting management companies to disclose their portfolio compositions with a one-month delay, rather than daily. This regulatory flexibility is expected to attract more asset managers to launch active ETFs in France, making the country a competitive hub for active ETF strategies.

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The Advantages of Active ETFs

Active ETFs offer several advantages that are increasingly appealing to a wide range of investors. Firstly, they provide greater liquidity compared to traditional mutual funds. Active ETFs can be traded on stock exchanges throughout the day, allowing investors to react quickly to market changes. This liquidity is particularly attractive to younger investors, especially those who entered the market post-pandemic and have shown a preference for more dynamic investment options.

Additionally, active ETFs simplify scalable distribution. These funds can be listed on multiple stock exchanges, facilitating international distribution, and broadening their appeal to both institutional and retail investors. Furthermore, active ETFs are well-positioned to meet regulatory demands, particularly in Europe, where “Value for Money” regulations encourage investors to seek cost-efficient products. With the potential for higher returns, active ETFs present a compelling alternative to more expensive mutual funds.

Another crucial advantage of active ETFs is their role as a growth driver in a market increasingly saturated with passive index-linked ETFs. For example, the markets for Eurostoxx and S&P 500 ETFs are highly competitive, with only a few ETFs dominating AUM. In contrast, active ETFs offer a differentiated product that can command higher management fees due to their potential for outperformance.

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Key Strategic Considerations for Launching an Active ETF

For asset managers contemplating the launch of an active ETF, several strategic factors must be considered. One key question is whether to utilize a white-label ETF platform, which can significantly reduce time-to-market and operational costs. Another critical decision involves the choice of Authorized Participants (APs), as their selection will impact the ETF’s liquidity and market presence【Source: Pericles Active ETFs】.

Asset managers should also assess the implications of a multi-listing strategy, which involves listing the ETF on multiple stock exchanges to maximize its reach. Additionally, considerations around issuing markets, impacts on existing information systems, and the capabilities of current asset servicers are vital factors that will determine the success of an ETF launch【Source: Pericles Active ETFs】.

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Conclusion: Active ETFs Are Shaping the Future of Asset Management

The rise of active ETFs marks a profound shift in the investment landscape. With the ability to provide customized, dynamic investment strategies, coupled with favourable regulatory changes, active ETFs are set to play a pivotal role in the future of asset management. For both investors and asset managers, the opportunities presented by active ETFs are vast, offering a powerful tool for portfolio diversification and a competitive edge in an increasingly complex market.