[ I N D E P T H | E T F s ] managed ETF funds bringing in a total of $ 56.1 billion over the period .
On 26 March , Guinness Atkinson Asset Management became the first investment firm to convert two mutual funds with assets of $ 21 million to actively managed ETFs . US investment bank Citi also confirmed plans to work with Dimensional Fund Advisors to switch six mutual funds , with total assets of $ 20 billion , to the active ETF wrapper in 2021 .
Despite the active portion of the market only making up 3 % of the $ 8 trillion total value of the ETF industry , these moves could represent turning tides as the mutual fund market and its lack of intra-day liquidity becomes more and more outdated .
Final hurdle The US market is undeniably leaps and bounds ahead of Europe in its uptake of more actively managed ETFs . This is largely due to the Security and Exchanges Commission ’ s ( SEC ) recent relaxation of its regulation in 2019 that allowed for more discretion in ETFs .
The SEC recently introduced new regulations that allow for discretion when disclosing which stocks are within an ETF wrapper , meaning ETFs no longer have to make public their holdings on a daily basis .
With one of the foundation pillars of ETFs being transparency , prior to this change in regulation they were not favoured by active fund managers . Many view their stock picking abilities as intellectual property and therefore do not wish to disclose the information .
“ There are active ETFs in Europe of course , but they ’ re still required to disclose their portfolio holdings on a daily basis . It limits the number of products that these issuers are looking to launch because they ’ re not necessarily comfortable with having that openness and transparency around their active trading strategies ,” says Steve Palmer , global head of ETF products at HSBC .
“ If we got to a position where the wrapper allowed for a similar structure to what the US is comfortable with through the SEC ’ s positioning of these active products , then I can certainly see that being a trigger point for the European market to start using the ETF wrapper for active products .”
Regulation remains the final hurdle between the European market and the wave of actively managed ETFs that has swept across the US .
“ The European market predominantly still expects
" It limits the number of products that issuers are looking to launch because they ’ re not necessarily comfortable with having that transparency around their active trading strategies ."
STEVE PALMER , GLOBAL HEAD OF ETF PRODUCTS , HSBC
ETFs to be transparent , but investors are on a journey to understand and see what more ETFs can do as it moves towards the active end ,” adds Legal & General Investment Management ’ s Li .
Diluted liquidity Whether actively managed ETFs can outperform passive rules-based ETFs and vice versa remains up for debate . However , one clear impact of the rise in active ETFs is the greater variety of choice that investors have .
Li explains that as more active strategies come to market , asset managers that previously did not issue ETFs because they lacked the index capabilities could now do so , meaning the ETF market will continue to grow .
“ If more active strategies are launched in an ETF wrapper , it means there is greater potential for investors who prefer active management to look to the ETF market for solutions . This can lead to more volume , which means more possible business for institutional traders ,” adds Li .
“ Suddenly the mutual fund has been listed on a stock exchange and it ’ s using the same infrastructure as trading Vodafone . As more of this market builds , there is more available business for traders to try to capture .”
Active ETFs do , however , bring with them an additional layer of risk that passive ETFs do not . For
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