ETF Market Sees Surge in Active Funds Amid Regulatory Scrutiny

ETF Market Sees Surge in Active Funds Amid Regulatory Scrutiny

The exchange-traded fund (ETF) market is witnessing significant developments, particularly in the realm of actively managed funds. This surge comes amid increasing regulatory scrutiny and evolving investor preferences.

Rise of Active ETFs

Active ETFs, which combine the benefits of traditional ETFs with active management strategies, have been gaining traction. In 2024, active ETFs attracted $295 billion in inflows, capturing a larger market share of 8.6 percent. This growth reflects investors’ appetite for funds that offer potential outperformance while maintaining the liquidity and cost advantages of ETFs.

Regulatory Concerns Over ‘Shy Active’ Practices

Despite the growth, a significant number of investment managers are facing criticism for promoting ETFs as actively managed while closely mirroring benchmark indices, a practice termed “shy active” by Morningstar. A survey by Carne Group found that 88% of wealth managers and institutional investors believe these ETFs fail to meet their active management claims. Transparency concerns, especially due to European regulations mandating daily portfolio disclosures, have impeded the launch of genuinely active ETFs, as managers fear revealing proprietary trades. However, new semi-transparent structures introduced in Luxembourg and Ireland are expected to encourage truly active fund strategies by protecting trade confidentiality.

European Asset Managers Embrace Active ETFs

European asset managers, such as Jupiter, are struggling to compete with US giants like Vanguard and BlackRock that have seen significant growth in index-tracking products, especially ETFs. To counter this trend, many European firms are embracing active ETFs, which combine active management skills with the operational advantages of ETFs. Despite rapid growth, with $1.03 trillion in global assets, active ETFs still face skepticism over their ability to save active investing. Analysts foresee potential for Europe’s active ETF market to grow significantly by 2030.

Capital Group’s Entry into Active ETF Model Portfolios

Capital Group, the largest active asset manager globally, is entering the active ETF model portfolio market with eight model portfolios made entirely of its own active ETFs. This move aligns with a growing trend where financial advisers prefer pre-constructed model portfolios to streamline their investment processes. These portfolios, which match specific risk levels or investment goals, are increasingly popular in the US. Capital Group’s new offerings leverage their 22 ETFs, which have garnered $53bn in assets. By utilizing ETFs, advisers benefit from lower fees and increased tax efficiency compared to mutual funds.

China’s Consideration to Open ETF Market to Western Firms

China is considering granting access to Western firms like Citadel Securities, Jane Street, and possibly Optiver to operate as market makers in its $520 billion exchange-traded fund (ETF) market. This move could enhance trading efficiency and reduce costs due to the experience international firms bring in providing ETF liquidity. Over the past two years, China has expanded its ETF sector significantly, growing 134% to become Asia Pacific’s second-largest behind Japan. Despite the growth, ongoing U.S.-China trade tensions, including recent U.S. tariffs of 145% on Chinese goods, may delay approval for U.S. firms.

Vanguard’s Dominance in ETF Flows

Vanguard triumphed over iShares in the US ETF flows competition for the fifth consecutive year in 2024, driven largely by its US equity market trackers. Vanguard’s ETFs received a net inflow of $308.2 billion, including $117 billion for its Vanguard S&P 500 ETF (VOO). iShares attracted $292.5 billion, led by its Core S&P 500 (IVV) with $86.5 billion and its Bitcoin Trust with $37.5 billion. Vanguard’s US equity products made up two-thirds of its new cash, while iShares saw more diversified inflows. Industry-wide, ETFs garnered $1.1 trillion in 2024 inflows, surpassing the 2021 record of $901 billion, with equity funds leading the charge at $773.2 billion.

As the ETF market continues to evolve, the interplay between active management, regulatory oversight, and investor demand will shape its trajectory in the coming years.

For more insights on the ETF market, visit Financial Times and Reuters.