This article is part of the LSEG Lipper European ETF Yearbook 2023 which has been published on April 11, 2024 and can be found here
A lot has been written about the success of active ETFs in the U.S. and subsequently about the outlook for active ETFs in Europe. Even as some articles may raise the impression that active ETFs are a new kind of product, they are not since the first active mixed-assets ETF launched in 2008 and the first active bond ETF in 2011. The first active commodities and equity ETFs were launched in 2012, while the first active alternatives ETF was launched in 2017. That said, despite the fact that some commodities ETFs use optimization techniques for the rolling of futures, there are currently no actively managed commodities ETFs available to investors in Europe.
Active ETFs have come into focus for market observers over the course of 2023. But are they also in the focus of the investors in Europe?
According to the Lipper database there were 72 active ETFs (primary share classes) registered for sales in Europe at the end of December 2023. These primary share classes are accompanied by 75 convenience share classes.
At the end of December 2023 active ETFs held €23.7 bn in assets under management, 1.52% of the overall assets under management in the European ETF industry at that point in time.
Graph 1: Market Share of Active ETFs of the Overall Assets Under Management in the European ETF Industry (December 31, 2023)
Source: LSEG Data & Analytics
With regard to the above, it is noteworthy that the market share of active ETFs increased by 0.15% over the course of 2023.
The Changing of the Guard in the Assets Under Management of Active ETFs
Given the fact that the segment of active ETFs started with bond ETFs, it was no surprise that bond ETFs (€8.4 bn) held the highest assets under management in the segment of active ETFs at the end of December 2022. This changed over the course of the year 2023 (please see the fund flow details below for information on this topic), as equity ETFs (€14.3 bn) held the highest assets under management in the segment of active ETFs at the end of 2023. Bond ETFs were the second largest category (€7.5 bn), followed by mixed-assets ETFs (€1.8 bn) and alternatives ETFs (€0.02 bn)
Graph 2: Market Share of Assets Under Management of Active ETFs by Asset Type (December 31, 2022, versus December 31, 2023)
Source: LSEG Data & Analytics
The change in the leading asset type was expected since equities are the largest asset type overall in Europe and ETF promoters and other asset managers have begun using active ETFs in their product strategies after seeing the success of these products in the U.S. As a result, we saw the launch of a high number of new active equity ETFs over the past two years.
Fund Flow Trends for Active ETFs
Overall, active ETFs accounted for estimated net inflows of €4.9 bn over the course of 2023. These inflows equal 3.15% of the estimated overall inflows in the European ETF industry. This means that the growth of market share in assets under management was mainly driven by estimated net inflows and not by market returns. This shows there is a real growth trend within active ETFs.
Generally speaking, active ETFs enjoyed inflows for 11 months over the course of 2023. Opposite to the overall trend for ETFs and the trend for active ETFs, November (-€0.5 bn) was the only month with outflows from active ETFs.
Graph 3: Monthly Estimated Net Flows for Active ETFs (in million euro)
Source: LSEG Data & Analytics
Equity ETFs (+€5.7 bn) was the best-selling asset type for 2023 in the segment of active ETFs, followed by mixed-assets ETFs (+€0.2 bn), and alternatives ETFs (+€0.02 bn), while active bond ETFs faced outflows (-€1.0 bn) for 2023.
Looking more closely, equites were the only asset type which enjoyed estimated net inflows for every month of 2023. Active alternatives (March) and mixed-assets ETFs (October) had outflows for one month over the course of 2023. Opposite to the overall trend in the European ETF industry, active bond ETFs faced outflows in eight of 12 months of 2023 which, as a result, led to overall outflows from active bond ETFs.
Graph 4: Monthly Estimated Net Flows by Asset Type for Active ETFs (in million euro)
Source: LSEG Data & Analytics
Since we don’t know the reasons why individual investors sold their active bond ETFs, one can only speculation that the high outflows in November 2023 might be a result of the surprisingly hawkish statements of the U.S. Federal Reserve. These statements led to a correction of investor expectations regarding the number of interest rate cuts, their start date, and overall level of interest rates over the course of 2024. As a result, some European investors may have readjusted their portfolios to the derived higher-for-longer rate environment.
What’s Next for Active ETFs?
The trend toward active ETFs is often compared to the success of these products in the U.S. Unfortunately, such a comparison is not valid because the success of active ETFs in the U.S. can mainly be attributed to a tax advantage compared to mutual funds—this is not the case in Europe. Even worse, not all countries in Europe have a level playing field for ETFs and mutual funds. For example, ETFs face a tax disadvantage compared to mutual funds in Spain. They also face a lack of infrastructure since investors have no access to respective (retail) trading platforms, etc.
Don’t get me wrong; I do believe that active ETFs will become one of the major growth drivers for the European ETF industry in the future. However, we are currently still at the beginning of this story. Therefore, I think that a lot of headlines we are reading now are way to flashy given the current size and importance of active ETFs in the European ETF industry.
Nevertheless, it is important to follow the developments in this segment quite closely, as one doesn’t want to miss the point when the spark ignites significant growth in the segment of active ETFs .
