A perennial debate among market participants is around the various merits of active versus passive strategies.
But even within those broad definitions there has been evolution, with active fund providers embracing strategies ranging from index plus to long/short and various iterations of factor investing.
In the passive universe, the traditional index fund continues to attract client capital, while exchange traded funds — products that track an index but are listed on a stock exchange — have added to the suite of client options here.
ETFs of a more thematic nature have also been created, and smart beta strategies that blend active and passive approaches.
Into this innovation have come active ETF strategies, which contain the characteristics of ETFs, notably being listed on a stock exchange, to invest actively in equities or fixed income.
Intraday pricing
JPMorgan Asset Management head of active ETF distribution Travis Spence says the key advantages of investing in the ETF structure for these funds is that while traditional open-ended funds, whether active of passive, offer daily pricing — ie, one price a day — ETFs offer intraday pricing — ie, they can be traded at the on-screen price by selling the ETF, a listed security in its own right, to a buyer.
He says this enables clients invested in these products to have “price discovery”, which is to know and understand the price they will receive for their investment before making the sale,
In contrast, the owner of a unit trust must accept the price at the end of the day.
Spence says: “The rapid growth we are seeing in active ETFs is based on investors recognising the unique benefits in combining an ETF vehicle with traditional active management. In other words, gaining access to active management in an ETF wrapper that provides daily transparency, liquidity, price discovery and competitive fees.
“Take the example of one of the largest active Ucits ETF, the JPMorgan US Research Enhanced Index Ucits ETF with current assets of $7.2bn [£5.6bn]. Since its launch in 2018, this ETF has leveraged an active investment process that we have been running since 1986, using the same investment team,” he continues.
“Because of the strong alpha the ETF has generated, with a tracking error that is very similar to passive ETFs, investors have used JREU as a first step beyond passive and into active ETFs for their US core equity allocations.”
Spence adds that clients of this strategy have said they own it for diversification away from the completely passive strategies that are causing client portfolios to be heavily overweight to a handful of stocks in the US technology space.
In terms of where the growth is within the active ETF universe, of the £20bn managed within the ETF structure at JPMAM, around £17bn is within active structures.
Globally, around 20 per cent of all flows into ETFs in 2023 were in active products.
The current strategy at JPMorgan is to offer ETF versions of its active ETF fund range to clients that prefer the latter structure, rather than to launch new funds solely within the ETF market.
Wide ‘bid/offer spread’
One of the areas in which the company sees growth is fixed income active ETFs, which attracted around 25 per cent of the total inflows into ETFs in Europe last year.
The fact that ETFs offer intraday pricing is not the advantage it may at first seem, says Harry Rogers, a portfolio manager at wealth management company Bentley Reid.
He says that while the prices are available at all times the market is open, an issue that puts him off investing in the asset class is the wide “bid/offer spread” that is between the price at which the ETF is offered to buyers and the actual price at which it is sold.
A wide bid/offer spread is usually a function of a relative lack of liquidity. Rogers explains this means that when he does use active ETFs in client portfolios, he ignores the intraday price and instead takes the end-of-day price, in the same way he would with an index fund.
He adds that one of the factors that restricts the extent to which he is invested in actively managed ETFs is what he calls a relative lack of product available in the areas where he wants to invest.
Evelyn Partners chief investment officer Edward Park says one of the issues he has with deploying client capital to ETFs in general within the model portfolio and fund of fund ranges is that many of the platforms on which his clients wish to access these portfolios regard ETFs as equities, and so levy a charge for owning them.
This serves to make managed portfolios that contain ETFs more expensive than those which do not.
David Thorpe is investment editor at FT Adviser
