Active ETFs: Opportunism or opportunity?

The emergence of active ETFs¹ has raised questions from all stakeholders about their development and the corresponding services. While their growth has been "explosive in recent years"² in the United States, their development in Europe has been less impressive. France recently joined the other European countries by authorising the issue and listing of these funds³. But is this likely to create an appetite for active ETFs on the French market and beyond?

Olivier Malteste, CIO at Yomoni⁴, shares his vision with us.

Favourable environment?

ETFs have numerous intrinsic advantages.  They can be traded during the day and they cover an extremely broad range of business sectors, asset types and geographical areas. A further advantage is that ETF fees are lower than those of other UCITS⁵ (e.g. 0.3% at Yomoni vs. 1% in general on traditional mutual funds⁶), which has a favourable impact on management fees.

On the strength of these advantages, the global ETF market is experiencing strong momentum. Growth forecasts range from +$5 billion in 2018 to +$11.5 billion in 2023 and are expected to reach +$25 billion at the end of the decade, though accounting for just 5% of the global asset management market⁷. The market is buoyant and many asset management companies, including Yomoni, are contributing to the trend by favouring ETFs in their allocations.

Positive momentum for active ETFs?

Let's go back to fundamentals. In the search for profit, and the quest to strike a balance between risk and performance, the question of fees is crucial. Active management is relevant in inefficient markets or very specific sectors of activity that require expertise, analysis and specialised research. All these additional costs increase management fees and require managers to take more bets and risks to outperform the market at least to the extent of these fees.

However, according to Spiva research, the percentage of active equity managers in Europe having outperformed the benchmark is 18% over 1 year but 7.2% over 10 years⁸. Barring rare exceptions, the index is "still" beating managers, a trend confirmed across global markets.

These statistics call into question the value of active ETFs, outside of specific management objectives. They also explain why Yomoni favours a high index component and a low active component. Favouring allocation and selection, Yomoni managers only need to deviate moderately from their benchmark indices to generate performance. As Olivier Malteste wrote in Yomoni's 2023 review: "Since the creation of Yomoni, around 8 years ago, we have beaten nearly 98% of traditional funds with equivalent risk⁹".

Growing appeal for active ETFs?

Although the appetite of French private investors for ETFs is growing, "only 11% of them say they hold ETFs¹⁰". Having scant experience with ETFs, private investors know little about their mechanisms, let alone the specific differences between passively managed ETFs and active ETFs. For example, an awareness test by Yomoni showed that only 20% of respondents were familiar with the concept of ETFs. The French market is still in the learning phase, and private investors remain focused primarily on the level of fees rather than the keys to understanding, namely tracking error and the reasons for outperformance.

The lack of significant demand for active ETFs reduces opportunities and the supply offered by managers. According to Morningstar, active ETFs account for just 1.8% of all assets invested in the European ETF market, or €28.9 billion at the end of 2023.

Moreover, some players have yet to enter the active ETF market. Talking to L'AGEFI in April 2024, Benoît Sorel, Head of ETFs, Indexing and Smart Beta at Amundi, said: "We are looking at market developments, of course, but we have not decided at this stage to include them in our offer¹¹".

The future for active ETFs?

While using active ETFs in allocations for performance purposes is confusing, issuers of ETFs may still be interested in them because of the flexibility they offer managers in, for example, facilitating the management of fixed income ETFs, which is often constrained by liquidity issues specific to this type of underlying asset.

But above all, as Olivier Malteste points out, a new generation of active ETFs is emerging, linked to ESG and the need for management companies to best comply with their non-financial criteria by freely adjusting exposures based on their analyses.

The recent Euronext listings of AXA IM and BNPP AM would appear to confirm to these findings¹².

Conclusion

In a dynamic ETF market, the share of active ETFs in the choice of managers remains moderate.

The modest share of active ETFs in Europe compared with the United States (8.5% at 31/03/2024¹³) results in particular from weak investor demand, competing returns from passive ETFs, and the low probability of outperformance. It is premature to conclude that active ETFs will grow in Europe as they have in the United States, the latter trend being the result of fiscal reasons¹⁴, robust distribution networks and a highly "financialised" population.

Will the development of European active ETFs be accelerated by the need to rigorously match the commitments made by issuing management companies with ESG criteria? To be continued...

Regardless of the directions taken and their motivations, Societe Generale will be able to support its clients in their development thanks to a wide range of services dedicated to ETFs, as it has done for more than 20 years now.

Find out more about our ETF services, as well as our Execution and Trading Services (I-DEAL)