Can active ETFs break out of their niche status in Europe?

Stay informed with free updates

Simply sign up to the Exchange traded funds myFT Digest — delivered directly to your inbox.

A growing number of asset managers are entering the active exchange traded fund arena in Europe. But how successful have they been?

The huge growth of active ETFs in the US has prompted many European firms to follow their US peers, positioning themselves early to attract the anticipated rise in client demand.

Fund houses have launched 35 active ETFs over the past 12 months, more than twice as many in the 12 months ending 30 June 2023.

However, inflows to the products remain modest for most managers.

This article was previously published by Ignites Europe, a title owned by the FT Group.

Net flows into active ETFs in Europe totalled €5bn in 2022 and €6bn in 2023. A similar total has almost been reached in the first six months of 2024, with inflows of €5.6bn, according to Morningstar data.

Although active ETF assets under management have grown by more than 40 per cent over the past year and doubled in size over the past three years, they still represent a small portion of the overall European ETF market.

Active ETFs manage assets of €45.5bn, accounting for only 2 per cent of all European ETFs, which is less than half the size of strategic beta, or smart beta, ETFs, which have €102.6bn, Morningstar data shows.

In Europe, ETFs remain a predominantly passive strategy, with assets of €1.8tn accounting for 92 per cent of the vehicles’ overall assets under management.

Jose Garcia-Zarate, associate director at Morningstar, said it was still “early days” for active ETFs in Europe, and they remained a “niche area” within the broader ETF market.

One company that has built sizeable active ETF assets in Europe is JPMorgan Asset Management.

JPMAM manages assets totalling €20.4bn in active ETFs, as of June 2024, resulting in a 45 per cent market share.

It has enjoyed inflows of €5.7bn into its European active ETFs over the first six months of 2024.

The next largest managers of active ETFs include DWS, Pimco, Fidelity International and Amundi, but none of these managers had assets above €5bn, according to Morningstar data.

Driven by JPMorgan’s “research enhanced” equity ETFs, equity funds are the largest active ETF products in Europe with assets of €23.8bn.

Active equity ETFs garnered inflows of €4.6bn over the first half of 2024.

Active fixed income ETFs attracted just €180mn.

However, experts are optimistic about the growth prospects for active ETFs.

Alan Flanagan, global head of client coverage for asset servicing at BNY, said: “Europe has definitely been moving slower on the ETF push than the US.”

But there were “good signs of growth” for the products in Europe, he added.

Garcia-Zarate said the increasing use of ETFs overall in Europe could support the growth of active ETFs.

“As more investors become comfortable using the ETF structure for their passive exposure, they may also consider using it for their actively managed allocation,” he said.

However, the tax advantages of using ETFs in the US make them “financially more attractive” than for European investors, Garcia-Zarate said.

It is this that is “a key driving force behind the proliferation of active ETFs in the US”.

“Overall, it is difficult to envisage the same potential for growth [in Europe as] in the US,” Garcia-Zarate said

Additional reporting by Amie Keeley

*Ignites Europe is a news service published by FT Specialist for professionals working in the asset management industry. Trials and subscriptions are available at igniteseurope.com.