Industry Insights: The Active ETF State of Play - A Worldview of the Growing Trend

Contributed by JP Morgan.

Explore the evolution and current landscape of Exchange-Traded Funds (ETFs), and the rise of actively managed ETFs. Initially introduced in North America in the early 1990s as passive, index-tracking vehicles, ETFs have evolved through several phases. By 2025, the ETF market has reached a new stage, offering complex portfolios with sophisticated instruments.

Globally, there are 12,000 ETFs with $14 trillion in assets, and active ETFs, though less than 10% of assets under management (AUM), captured 20% of 2023 net flows. The U.S. leads in actively managed ETFs, but Europe and Asia are poised for growth, requiring asset managers to adapt to regional demands. Dive into how these developments are shaping the future of investing.

ETF Landscape: Where We Are Now

ETFs, introduced in North America in the early 1990s, gained popularity for their simplicity and transparency, initially serving as passive, index-tracking vehicles. Call that period ETF 1.0. By the mid-2010s, ETF 2.0 emerged with smart beta and factor-based products, aided by the SEC's 2019 Rule 6c-11, enhancing tax efficiency and reducing costs. Despite initial concerns, actively managed ETFs gained momentum, with transparency not negatively impacting performance. By 2025, ETF 3.0 has appeared, offering complex portfolios with sophisticated instruments.

Globally, there are 12,000 ETFs with $14 trillion in assets, and active ETFs, though less than 10% of AUM, captured 20% of 2023 net flows.[1] The global active ETF market reached $923 billion by June 2024, growing at a 40% compound annual growth rate (CAGR) over 10 years.[2] A Blackwater survey shows 92% of asset managers plan to enter the ETF space by 2026.[3] As the U.S. leads in actively managed ETFs, Europe and Asia are poised for growth, requiring asset managers to adapt to regional demands.

It is vital for every asset manager to understand how this complexity can manifest in the real world to meet end investors’ demands, according to regional and country-specific nuances.

Regulatory Boosts in the U.S.

American regulatory shifts are likely to continue encouraging the global rise of complex but more accessible actively managed ETFs, a phenomenon asset managers must be ready to handle.

While passive ETFs still dominate, actively managed ETFs saw a 37% global growth in 2023, outpacing passive ETFs' 8% growth, especially in the U.S. [4] Since the 2008 introduction of actively managed ETFs in the U.S., their assets have reached $696 billion, as of June 2024, with the U.S. active ETF/ETP market representing 75% of global active ETF AUM.[5]

The ETF Rule has facilitated the creation of actively managed ETFs, appealing to retail investors and leading to 1,500 strategies, as of May 2024, up from 300 in 2018. [6] Conversions from mutual funds to ETFs have increased, with 77 conversions worth $110 billion from 2021 to May 2024. [7]Actively managed ETFs are expected to reach $4 trillion by 2030, mainly at the expense of active mutual funds. [8] The SEC may soon allow a multi-share class structure, further boosting ETF growth. The U.S. success with actively managed ETFs is influencing global markets, but asset managers must navigate diverse regulations and buyer preferences in regions like Europe and Asia.

Active ETF Retail Investor Surge in Europe

Of course, no “big bang” type event such as the ETF Rule is fueling the expansion of ETFs in Europe. But while Europe’s ETF volume lagged the U.S.’s from 2019 to 2022, it pulled ahead by 2023 in percentage growth. Diversification is the top motivation for asset managers to select an active ETF.[9]

Part of the European growth in actively managed ETFs with complex, bespoke investment baskets stems from the emergence of retail brokerages in the region that allow greater access to these increasingly intricate investment vehicles. European retail investor zeal for actively managed ETFs amid this new access mirrors that seen in the U.S. This is fueled by the increasing complexity of the basket of investments along with general advantages of ETFs like intraday liquidity. The potential for lower withholding tax rates on dividends from stocks listed overseas represents another benefit for European investors in ETFs.

In Europe, while ETFs have traditionally been geared towards institutional investors, asset managers must increasingly consider how to create, sell, and market ETFs to a growing bevy of retail investors. With Ireland as the leading ETF domicile in Europe, the Central Bank of Ireland actively engages with market participants to offer flexible scenarios to introduce innovative ETF products and structures to the market, that increasingly appeal to the retail investor.

In fact, 20% of 2023 net flows of Undertakings for Collective Investment in Transferable Securities ETFs (UCITS ETFS), created to give retail investors transparent and regulated cross-border investment opportunities, went into active ETFs.[10] In addition, the recent advent of incorporating listed shares into a non-ETF umbrella and the recasting of non-ETF funds as UCITS ETFs represent further ETF market entry points for asset managers building a wrapper that provides UCITS opportunities for retail investors. It is worth noting that the Commission de Surveillance du Secteur Financier, the Luxembourg financial regulator, has announced that it will relax portfolio transparency requirements for active ETFs. This move to lessen regulatory burdens for asset managers would help Luxembourg compete with Ireland as a hub for domiciling ETFs.[11] Regulation, such as the Retail Distribution Review in the U.K. and the Markets in Financial Instruments Directive across Europe, is focused on ensuring managers are selling the most suitable product to their clients. This, in turn, is likely further helping the growth of ETFs. Asset managers will also have to navigate catering to the rising cohort of active ETF retail investors across different countries in Europe who have varying tax demands, currencies, and languages that make distribution more complicated than in the U.S. where there is a single market, currency, and trade settlement location.

Retail investors in Europe are also more focused on sustainability and thematic investing. In terms of catering to the rising crop of retail investors in Europe, for example, asset managers may do well to take note of their enthusiasm for thematic investing within actively managed ETFs, particularly around custom baskets of ESG equities that follow a narrative and set of values they hold in high regard. That has been all the more appealing following the enactment of the Sustainable Finance Disclosures Regulation (SFDR) in March 2021. In 2022, global ESG ETF volume rose to $400 billion from just $50 billion five years prior.[12] This European growth likely stands to be all the more robust ahead: the EU’s Corporate Sustainability Reporting Directive (CSRD), which took effect in January 2023, is aiming to provide comprehensive disclosures about company sustainability practices that may, in turn, allow investors to make more intentional and green-conscious decisions about their investments. This type of thematic investing with an anchoring premise is possible with the customisation and transparency available in actively managed ETFs. And though the underlying investments within the customised baskets may be more complex, it is incumbent upon the asset manager to create ETFs that simplify the value proposition for potential retail investors. In doing so, asset managers must also seek service partnerships that streamline and support their needs as issuers.

Growth in Australia, Canada, and Beyond

Actively managed ETFs are gaining global traction due to their diversified exposure, lower fees, and asset transparency. The 160.5% growth in ETF assets in APAC (ex-Japan) from 2019 to 2023 outpaced that of both the U.S. and Europe, and the region’s actively managed ETF growth saw particularly massive gains over that period, rising nearly 10-fold to $87.3 billion.[13] Retail investors continue to dominate the ETF landscape in Australia, accounting for 74.6% of ETF investors,[14] and they have a growing appetite for actively managed ETFs, which constitute 15% of total ETF assets in Australia. [15] Though actively managed ETF momentum in Australia was initially propelled by asset managers’ propensity to convert listed investment companies (LICs) to ETFs, asset managers now must be able to maneuver the complexities of issuing dual-access ETFs. In the dual-access structure, investors have the choice to access investment funds via an exchange or traditional unlisted distribution channels.

Around the world, fund managers must adapt to meet growing demand for ETFs and country-specific requirements. Canada, with $313 billion in ETF assets by 2023, leads in active ETF adoption, aided by regulatory flexibility. [16] Asset managers enjoy regulatory flexibility in Canada, with ease of ETF market entry and confidentiality around strategies. This is thanks to the ability to launch ETFs as a share class of a mutual fund there and the country’s discretion in revealing disclosures to a lead market maker without disclosing to the broader marketplace. Japan's ETF market, though insular, is set for growth with policy changes that have allowed for actively managed ETFs to emerge for the first time. [17] Taiwan's fast-growing ETF market, with enthusiastic participation from retail investors and dual-listed currency permitted, is set to open to active ETFs, predicted to reach $6.25 billion by the end of 2025.[18] Latin America's ETF market, though smaller, saw a 64.3% growth from 2019 to 2023, with actively managed ETFs emerging in 2021. [19] Asset managers must navigate these diverse markets and challenges as actively managed ETFs rise globally.                                       

Global Expertise Is Essential

Given that each region, and often each particular country within, has its own specific nuances regarding how issuers approach launching an ETF to meet end investors’ demands while abiding by regulatory subtleties, familiarity with these intricacies can help ETF issuers comprehend the demand for the investment vehicles they have created, how it impacts the appetite for them by liquidity providers, and who is best positioned to maintain, support, and service those products as a service provider.

ETF growth drivers differ from traditional mutual funds, with factors like branding, advisor channels, and investor types playing distinct roles. Asset managers should leverage legacy distribution but adapt to new business models, including model portfolios, Turnkey Asset Management Programs (TAMPs), Robo-Advisers, and self-directed accounts. Simple outcomes remain crucial for consumers, and expressing a firm's unique investment identity is key. Issuing complex ETFs requires meeting investor demands and compliance, benefiting from knowledgeable global partners. J.P. Morgan offers comprehensive ETF services, leveraging market making, asset servicing, and FX services to enhance execution and governance. From a technology standpoint, J.P. Morgan also offers a global platform with a centralised ETF service team – distributed across Sydney, Dublin, and Boston. All told, J.P. Morgan’s global platform supports asset managers throughout the trade lifecycle, providing expertise in product development, market making, and liquidity.

Contacts

Monica Vidulich - Head of Bank-Owned Asset Managers and EMEA ETF Sales

monica.vidulich@jpmorgan.com

Ciarán Fitzpatrick - Global Head of ETF Product

ciaran.fitzpatrick@jpmorgan.com

[1] J.P. Morgan Quantitative and Derivatives Strategy, Bloomberg Finance L.P. Data as of end of May 2024, 2024 Global ETF Handbook, J.P. Morgan

[2] Bloomberg Finance L.P. ETFGI

[3]“What European Mutual Fund Managers Think About ETFs,” Blackwater, March 2024

[4] Morningstar, Yearly Flows Report, 2023

[5] Ibid.

[6] Ibid.

[7] Bloomberg Finance L.P. ETFGI

[8] Decoding Active ETFs, Blackrock, July 2024

[9] Ibid.

[10] Ibid.

[11] Luxembourg Regulator to Relax Transparency Requirements for Active ETFs, ETF Stream, Dec. 19, 2024.

[12] ETFGI Global ESG ETF and ETP Industry Insights, December 2022.

[13] ETFGI ETF Asia Pacific (Ex Japan) Industry Insights, December 2023

[14] 2024 Computershare ETF Insights, Computershare

[15] Ibid.

[16] ETFGI ETF Industry Insights, December 2023

[17] Ibid.

[18] Ibid.

[19] ETFGI ETF Industry Insights, December 2023