Only one-quarter of European institutional investors have pursued investment strategies that include actively managed exchange-traded funds, according a recent survey released by J.P. Morgan Asset Management.
Actively managed ETFs, as the name implies, differ from passive ETFs in that they have managers making decisions in an attempt to outperform the markets, while passive ETFs have no manager and aim to match the performance of broad market indexes.
For the survey, J.P. Morgan interviewed 70 institutional investors, of which 29 are pension funds, 19 are insurance firms, 18 are institutional consultants and four are foundations.
According to the report, although institutional investors are increasingly considering the investment vehicle, significant hurdles remain that are preventing active ETFs from gaining traction. The report cited confusion and a lack of knowledge about the vehicles, saying that “many considerers struggle to distinguish active ETFs from smart beta or passive ETFs,” adding that “some believe they are ‘lightly active,’ involving minimal human input, while others assume they function more like traditional active mutual funds.”
The lack of familiarity with active ETFs “undermines confidence and hinders adoption,” the report stated, adding that “it can feel hard to explain active ETFs to a board, for example, if the lines between active and passive are too blurred. Greater education of the benefits of active ETFs can help to overcome this hurdle.”
Additionally, problems concerning taxes and domicile issues can “further complicate matters,” the report said, noting that Swiss pension funds, for example, prefer local products for tax efficiency, “while for others, the treatment of withholding tax for equity-based ETFs can feel like a dealbreaker.”
The report argued that investors are missing an opportunity to outperform passive ETFs and to take advantage of potential liquidity benefits. However, “the general lack of interest in intra-day liquidity means active ETFs are being overlooked or just not ‘landing on the radar.’”
According to J.P. Morgan, its survey found that ETF usage varies widely across Europe and typically accounts for 15% to 30% of asset owners’ portfolios. In Europe, allocations to active ETFs were highest in Italy, France and Germany, according to the report, while U.K. institutional investors’ interest is well behind that of the other countries.
“Momentum for increased allocations is building, however, thanks to cost pressures and more interest and awareness of what ETFs can offer in areas like risk and transition management,” the report stated.
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Tags: Active ETFs, actively managed ETFs. exchange traded funds, ETFs and Indexing, J.P. Morgan Asset Management