Launches in active exchange-traded funds have been on the rise in recent years. According to J.P. Morgan, this type of product will continue to gain prominence as it can essentially convert most actively managed strategies.

At the end of 2024, assets under management in the global exchange-traded funds (ETF) market hit the $15 trillion mark for the first time ever, marking a 30 percent year-on-year increase.

Within the market, one emerging trend is the rise of active ETFs. Since 2020, there have been more annual launches of active ETFs than passive ones in the US market and assets in active ETFs globally reached $1 trillion in 2024. According to J.P. Morgan Asset Management (JPMAM), it projects that the global ETF industry will expand to $30 trillion in assets, of which $6 trillion will be in active ETFs.

What is an Active ETF?

Active ETFs combine the characteristics of the exchange-traded vehicle with actively managed investment strategies. They essentially attempt to replicate an actively managed portfolio, leveraging the benefits of research and security selection, through an ETF wrapper with its advantages in daily transparency, intraday liquidity, lower costs, accessibility and portfolio efficiencies.

The first active ETF was a short-term debt vehicle launched by Bear Stearn in the US in 2008. Compared to 2019, flows into active ETFs in 2024 grew nine-fold to $350 billion, or 21 percent of all ETF flows.

Convincing Portfolio Managers

According to Philippe El-Asmar, APAC head of ETF, direct and digital at JPMAM, the initial response to the idea of active ETFs was lackluster, primarily due to reluctance from portfolio managers.

«They didn't want to give away their secrets because they felt, if I'm going to tell you, these are all the positions I own, you might go ahead and kind of replicate my portfolio or steal my alpha,» El-Asmar said at a recent media luncheon attended by finews.asia. «But the big difference is that the portfolio managers bought into the idea and see the benefit of using active ETFs.»

Competing With Mutual Funds

Admittedly, active ETFs compete directly with traditional mutual funds by replicating portfolios and performance at a lower cost with higher liquidity. However, not all actively managed strategies are fit for the ETF wrapper making the latter vehicle still a superior option in certain cases.

«For example, if you're doing alternative investments where the liquidity isn't strong, you need to control that through a mutual fund structure. You can't offer intraday liquidity on a forest or a bridge. if you've got really concentrated portfolios or long/short, particularly in really small cap positions, that really should probably not have that intraday liquidity either,» explained Rory Caines, APAC ETF specialist at JPMAM.

«But outside of that, we feel that the ETF can essentially accommodate almost any other strategy because all it does is bring those structural benefits to the strategy.»

Client Types

According to El-Asmar, he observes that there are three kinds of clients that are buying active ETFs.

«There are some clients who currently use passive who think it's a better alternative because they can have a similar tracking error with some possibility of alpha. Some clients switch from their active mutual fund allocation to ETFs because they have additional liquidity, transparency and cost efficiency. But there's also a whole host of clients who didn't invest in either passive ETFs or mutual funds that buy some of these income-based ETFs,» he said.

Late Entrant

JPMAM is a relatively late entrant into the ETF industry, having launched its first product only in 2014. Instead of competing with traditional passive rivals, it aims to differentiate with a focus on active ETFs by leveraging its existing strengths in active management. Today, 70 out of its 130 ETFs globally are active.

The American asset manager outlined its goal of obtaining a 15 to 20 percent market share in active ETFs. In its overall ETF business, it aims to reach $1 trillion in assets by 2030, up from its current level of $240 billion.