This shift is being fuelled by regulatory developments, rising investor demand, increased product launches, and more managers entering the space.
Patrick O’Brien, Managing Director of Business Development at Carne Group, commented: “Active ETFs will increasingly offer managers the opportunity to expand investor choice and product diversity. The evolving regulatory landscape is enabling these managers to enter the ETF space, which has traditionally been dominated by passive funds.”
Carne Group highlights that growth in the active ETF market will be supported by the involvement of leading asset managers, such as Robeco, iShares, Eurizon Capital, and ARK Invest, who are either launching active ETFs in Europe or planning to do so. A potentially more favourable regulatory environment could also contribute, particularly following the European Securities and Markets Authority’s (ESMA) UCITS eligible assets directive, issued on 7 May 2024, which may broaden the scope of the active ETF sector.
Globally, actively managed strategies are playing an increasingly significant role in the ETF market. In the first half of 2024, they attracted 25% of fund flows, achieving an organic growth rate of 20%. Assets under management in active ETFs reached a record $889 billion, up from $714 billion at the start of the year.
In Europe, active ETFs made up 3% of ETF flows in 2022, compared to 1.5% of total assets under management (AUM). By 2023, these figures had risen to 5% and 1.8%, respectively.
Research from Carne Group indicates that institutional investors are planning to increase their allocations to ETFs, as the sector becomes an integral part of their core holdings. A study involving wealth managers and institutional investors, including pension funds, insurers, and family offices with a combined $1.7 trillion in AUM, found that more than four out of five (84%) expect to allocate 5% or more of their investment assets to ETFs within three years. Around a third (32%) anticipate having over 7% in ETFs. Currently, approximately two-thirds (67%) of those surveyed hold less than 5% of their assets in ETFs. This predicted growth reflects a broader shift in institutional sentiment, with almost all respondents (97%) now viewing ETFs as core holdings rather than short-term allocations.
In a similar study conducted by Carne, nearly half (48%) of institutional investors expect the global ETF market to be worth $14 trillion or more within the next four years, up from $10.2 trillion in June 2023.
Carne’s research also reveals that institutional investors are drawn to ETFs due to their ability to provide access to otherwise hard-to-reach asset classes, and their capacity to offer concentrated exposure to specific markets. Innovation, coupled with lower costs compared to other investment structures, is also seen as a significant benefit.
Patrick O’Brien added: “Institutional investors are poised to increase their ETF allocations over the next three years, with ETFs now firmly regarded as core holdings rather than short-term tools. The growth of active ETFs will bring even greater choice, further boosting ETF investments as part of institutional core portfolios. This trend will be supported by the entry of new managers and the opening of additional distribution channels.”
