Active ETFs are beginning to catch up with their passive counterparts, according to a new study of the European ETF market.
However, there are still wide variations across Europe in terms of the best use for active ETFs, the pros and cons and also the most successful issuers, suggesting that the active ETF market is still relatively nascent.
The European Fund Selector Study conducted by UK-based Research in Finance found that 2024 was a record year of growth for both passive and active ETFs with total net inflows 88 billion above the previous record set in 2021.
Passive ETFs still make up the vast majority of the ETF market – 92% of intermediaries with an ETF offering provide passive ETFs. However, active ETFs are “growing at a substantial rate”, according to the study, with 49% of intermediaries now recommending and allocating active ETFs.
The survey, which featured 450 retail fund buyers and distributors, also looked at the pros and cons for both active and passive ETFs.
For passive ETFs, the two biggest benefits were the low cost and the low tracking error while market risk and volatility were cited as the biggest drawbacks; for active ETFs, respondents cited the potential to outperform passive funds, however the potential for underperformance was given as the biggest drawback.
The survey also asked respondents who they considered to be the market leaders in the active ETF market. While JP Morgan was ranked as the number one issuer, BlackRock was ranked as second despite being a relative newcomer to the active ETF market.
According to Research in Finance, this suggests that many intermediaries less familiar with active ETFs assume BlackRock is a leader in this space. In addition, the fact that twice as many brands were mentioned by respondents as active ETF issuers (43) compared to passive (22) suggests there is a lesser concentration of active ETF providers in the minds of fund buyers, with a wider competitive field.
“Our latest research highlights that active ETFs have piqued the interest of many European intermediaries already using ETFs in general,” said Mark McFee, editorial and insights director at Research in Finance.
“However, it is clear from survey data and in-depth interviews that awareness and perceptions of active ETFs still vary across the region, with mixed views on the pros and cons, preferred levels of active risk, the dividing line between active and smart beta ETFs, and even who is providing these products. As uptake continues to grow, asset managers have an opportunity to educate the market and shape the conversation around active ETFs.”