For a long time, investors and market observers discussed the issue of active versus passive products as an either or discussion. Many relied on either passive (ETFs) or actively managed investment products (mutual funds) instead of seeing the two investment product types for what they really are—two sides of the same coin!
Nowadays, it looks like what belongs together is growing together. Promoters of actively managed mutual funds are discovering the ETF wrapper as a distribution channel and are starting to launch corresponding products. Although this trend has only established itself in the U.S. so far, we have seen various fund promoters in Europe are also thinking about offering their products and strategies as ETFs or ETF share classes of existing funds in the future.
The so-called semi-active ETFs have been around in Europe for some time, but true actively managed ETFs are not established in the European fund industry yet. However, this could change soon. After the patent on so-called ETF share classes of mutual funds—which was held by Vanguard—expired in April 2023, HSBC was the first fund promoter to announce ETF share classes for some of its actively managed mutual funds. From my point of view, it can be assumed that many other providers will also use this option in the future since ETF share classes will enable the respective fund promoters to establish new—currently untouched—distribution channels.
One indicator that there is high interest in the launch of ETF share classes is the regulatory competition between Luxembourg and Ireland (the two largest fund domiciles in Europe) with regard to the naming convention rules for ETFs. While Luxembourg offers a practical and convenient solution for fund promoters who want to launch ETF share classes, the Irish solution is rather somewhat complex from the perspective of fund promoters and investors. Even though the respective regulation approaches differ, it is clear that the local market regulators from the major fund hubs in Europe would not deal with this issue if there were no demand from fund promoters.
By launching ETF share classes, the promoters of actively managed mutual funds aim to benefit from the trend toward ETFs and want to tap into new distribution channels. Since most of the new ETF platforms and the so-called neo-brokers can’t handle traditional fund trading, the promoter of actively managed mutual funds currently miss the opportunity to serve the rapidly growing number of users of these platforms. In order to be able to offer their products to these customers, the promoters of traditional mutual funds must offer corresponding solutions.
From my point of view, the launch of actively managed ETFs or ETF share classes is a positive development. On one hand, investors will benefit from a greater variety of products through these new products, which they can use to achieve their investment goals. On the other hand, the promoters of actively managed mutual funds will have to adjust their fees to the common price level for ETFs in order to compete with existing ETFs when they launch ETF share classes. Accordingly, the shift toward active ETFs could be positive for all investors, as this my mean that the promoters of actively managed mutual funds might adjust the fees for all products.
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 Refinitiv Lipper or LSEG.
