Richard Romer-Lee, chief executive of investment management firm Square Mile Consulting and Research, says a feature of the past two decades has been that the advice process “has become more personalised”, in that clients get a service focused on themselves as individuals.
One of the ways this has manifested itself is via greater transparency around costs and charges, with the client now more aware of where each part of their fee is going.
That has contributed to a move by many investment managers to head towards passive solutions as a way to keep the total cost of investing down.
But for investment managers or their clients who wish to have exposure to active funds, are actively managed ETFs with lower fees cheaper than other actively managed funds?
Data from Morningstar shows that while active ETFs have been gaining market share, they presently represent 1.9 per cent of the total ETF market in Europe and 4 per cent of the global active fund market.
Bryan Armour, director of passive strategy research for North America at Morningstar, says that while most of those assets are held in equity strategies, much of the recent growth is coming from clients accessing fixed income ETFs.
Armour says one feature of active ETFs is that they do not need to close to investors if they reach a certain size, as the actual ETF can be sold. But he still prefers active ETFs that invest in liquid asset classes.
He says: “Fixed income was the most popular active ETF asset class early on, but active equity ETFs have ascended the throne. Active multi-asset ETFs are few and far between. Unlike mutual funds, ETFs can’t close to new investors when they get too big. Strategy capacity is critical in the ETF structure.
"Morningstar analysts recommend focusing on ETFs that hold liquid securities and reasonably diversified portfolios to avoid capacity risk. ETFs present a growth opportunity for active managers, but trading illiquid ETFs can be costly for investors. Waiting for an ETF to grow its asset base and build a track record can benefit investors."
On the issue of fees, Morningstar says that the average charge levied on an active ETF has fallen from 41 basis points in 2013 to 27 basis points today.
JPMorgan’s present strategy is to make its range of actively managed open-ended funds available in ETF format for those that want that structure.
In terms of fees, Travis Spence, head of ETF distribution EMEA at JPMorgan Asset Management, says that while active ETF fees are higher than passive ETFs, the fees on active products are broadly in line with those on an institutional share class on an actively managed mutual fund.
Traditionally advisers and their clients would not be able to access institutional share classes as the minimum ticket size for those tends to be higher than that appropriate for a retail client.
Spence says: “In terms of pricing, it really depends on the strategy and the level of active management. While these can vary quite a lot, there are cost advantages inherent in the ETF vehicle that are passed on to investors."
Most ETFs are listed on stock exchanges in Europe, and Spence says that many are listed on multiple exchanges.
As they tend to be Ucits compliant, they can be sold in the UK and across the continent.
Investors conscious of currency risk can, notes Spence, usually access hedged share classes for the ETFs on the market.
Richard Philbin, chief investment officer – investment solutions at Hawksmoor, sees a role for active ETFs in portfolios.
He regards the fact that such products can be priced intraday as being a key advantage, particularly for clients that need to be conscious of liquidity.
Philbin says he regards the cost structure of active ETFs as “competitive”, but adds that the biggest driver of demand may be the range of assets one can invest in.
He says: “Their cost structures are competitive and because of what can be invested in them they allow greater choice for investors compared to other forms of collective investment schemes.
"One of the fastest growing ETFs of this year, for instance, is the Nvidia 3x leverage product, which is, as it says, an ETF on a single stock that is three times geared. I’m not saying this is a good thing, or a bad thing, but compared to a unit trust, which has to pass the 5/10/40 rule, the ETF has different characteristics."
He adds: “It isn’t just stocks or leverage (derivatives) that can sit inside the ETF structure, physical commodities and digital assets (NFTs, crypto etc) can also be allowed (assuming local regulators approve), which creates opportunities for portfolio managers to be specific or targeted when it comes to construction.
"Furthermore, for short-term access to the market, it allows portfolio managers to get money into the market while they build into positions that might be less liquid.
"For instance, should a fund take a lot of money in one go, the fund manager can get beta exposure immediately through buying an ETF and use the liquidity needed when they are buying the less liquid assets by selling down the ETF."
Philbin notes that one issue for wealth managers is that the platforms on which those portfolios are held “often don’t handle live trading assets very well”.
david.thorpe@ft.com
