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June 16, 2024

Monday Morning Memo: Why Active Managers Should Wrap Their Portfolios in an ETF

by Detlef Glow.

We are now seeing a high news flow with regard to active ETFs. Conversely, the market share of these products in Europe is by all measures quite low. So why should a fund promoter think about using the ETF wrapper?

Obviously, the assets under management in active ETFs are growing at a high pace but this is caused by the low basis rather than by massive inflows. This means the current high growth rate can’t be seen as reason for an active fund manager to move into the segment of active ETFs—especially since the inflows into active ETFs are currently highly concentrated into a few ETFs.

Nevertheless, active ETFs are seen as one of the main drivers of the future growth of the European ETF market. Therefore, it may make sense for a fund management company to be an early adopter and build a respective product offering to become a well-known and established player in this market segment.

From my point of view, the most important reason why an active fund manager should consider offering its strategies in an ETF wrapper are the advantages of ETFs compared to mutual funds when it comes to fund distribution.

While fund promoters have to sign distribution agreements with every single distribution agent or fund platform to make a mutual fund available to investors in a given country, an ETF needs only a listing on one exchange and will be available to investors all over Europe who have a respective trading account.

That said, unfortunately it’s not that easy, since investors in Europe like to trade securities on their preferred exchange. This means an ETF needs multiple listings to reach all kinds of investors in Europe. In addition, the ETF promoter might need to sign listing agreements with the different neo-brokers to become part of their product offering and to reach investors who are only using these kinds of platforms. Nevertheless, it might be worthwhile to undertake this effort since the respective fund managers would otherwise never get their product on the menu of the fast growing community of self-advised investors who are the largest customer group of neo-brokers.

From my point of view reaching these neo-brokers should make active fund managers think twice about offering their strategies either as an ETF or launching an ETF share class of an existing mutual fund, since an increasing number of investors in Europe are using neo-brokers or respective trading accounts from traditional banks and fund promoter who offer only mutual funds will miss this growing market and may limit their future success.

That said, a mutual fund which doesn’t get purchased solely because it has a sales registration, an ETF doesn’t get purchased solely because it is listed on an exchange. This means the ETF promoter needs to create tailored marketing and customer education campaigns for the ETF to drive sales numbers. Even as this sounds similar to what needs to be done to drive the success for the distribution of mutual funds, running marketing campaigns for ETFs is quite different than for mutual funds, as the target audience is using different communication channels. But this would be a topic for another Monday Morning Memo.


This article is for information purposes only and does not constitute any investment advice.

The views expressed are the views of the author, not necessarily those of Lipper or LSEG.




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