JPMorgan has carved out a dominant position in Europe’s nascent market for actively managed exchange traded funds, far surpassing the level in its US home market where it manages the largest such vehicle.
The bank’s asset management arm boasted a 44.2 per cent market share in Europe at the end of March, according to figures from Morningstar, far ahead of Pimco, with 14.6 per cent and Fidelity with 11.1 per cent.
The overall market size remains small, at €33.8bn spread across 87 active ETFs, but it has expanded by about €10bn in the past 12 months.
In the US, where ETFs have tax advantages over mutual funds, helping fuel their growth, JPMorgan’s Equity Premium Income ETF (JEPI) alone is almost as large as the entire European active ETF market, with assets of $33.8bn.
In the US market, where JPMAM is the number two player to Dimensional Fund Advisors, active ETFs held $530bn of assets at the end of 2023, according to Morningstar, 8.5 per cent of a broader ETF market once seen as synonymous with low-cost passive investment.
Travis Spence, head of Europe, the Middle East and Africa for ETF distribution at JPMorgan, said in November that “we believe the future of ETFs is active and intend to continue leading the active ETF revolution. 2023 has been a breakout year for active ETFs.”
Last month George Gatch, chief executive of JPMAM, said that globally it managed $160bn in active ETFs, a number it wanted to increase to $1tn within five years.
“This is one of the most fundamental changes in the asset management market,” he said, noting that in the US mutual funds shed about $800bn in assets last year, while ETFs gained about $800bn, with active ETFs accounting for a fifth of all inflows to ETFs.
In Europe, the US house already has five of the six active ETFs most owned by fund-of-fund managers, an important outlet for such funds, according to Morningstar.
Various global or regional variations of its research-enhanced equity series, which seeks to “modestly” overweight stocks deemed to be overvalued and underweight those seen as overvalued, with low tracking error to the underlying index, have proved most popular.
This relatively timid approach to active management is symptomatic of the broader European active ETF market thus far.
“The market seems so far divided in two broad clusters. On one hand, a group of cheap, low-tracking error products often intended to provide a broad, core exposure to the market segment: HSBC, JPM, Fidelity, and Invesco stand out in this area,” said Monika Calay, director of passive strategies research for the Emea region at Morningstar.
These tightly constrained “shy active” products “offer a less punchy entry point for investors and allow for greater scalability, whereas the low fees make them more competitive against both traditional active and passive propositions,” she added.
Fidelity, for example, sees “an interesting middle ground between fully active and fully passive portfolios”.
Meanwhile “a second cluster includes more niche and expensive products that have mostly been launched in the last two years” and typically include thematic and style-focused strategies that have thus far attracted far fewer assets.
This relatively risk-averse approach to active investing chimes with the most successful offerings in the US, where JEPI uses options to reduce market risk, compared with a standard benchmark tracker.
US market leader Dimensional’s active ETFs use factor-based investment approaches to tweak underlying benchmark weightings in an attempt to produce outperformance, rather than making the kind of large, punchy bets embraced by a house such as Ark Invest, whose flagship Ark Innovation ETF (ARKK) is now the seventh-largest active equity ETF in the US after enduring a gut-wrenching rollercoaster ride.
In the US market as a whole, the weighted average active share of actively managed ETFs — a measure of how different a fund’s portfolio is from its benchmark — is just 50.3 per cent, according to Morningstar calculations, compared with 62.4 per cent for active mutual funds.
“Conventional wisdom says that ETFs are best suited for index-like strategies with low active share,” said Bryan Armour, director of passive strategies research for North America at Morningstar.
“Their transparency and inability to close [to new money, as mutual funds can] could pose capacity problems for concentrated, high active share strategies that rely on a handful of best ideas.”
Although active ETFs comprise just 2 per cent of the broader European ETF market, Calay predicted this would rise, increasing competition for JPMAM in the process.
“The European active ETF market is expected to experience accelerating growth as an increasing number of prominent asset managers enter the field,” she said.
“Recent news has been flooded with announcements from major players such as Robeco, BlackRock’s iShares, Eurizon Capital, Ark Invest and others, all either launching or planning to introduce active ETFs in Europe. This interest from established institutions suggests that the active ETF space is poised for expansion.”
Market growth may also be aided by keener fees, with asset-weighted costs in Europe’s active ETF market falling to a record low of 0.27 per cent of AUM by March 2024 from 0.41 per cent when Morningstar started tracking this figure in 2013.
“I was a little bit shocked by that: 27 basis points is just crazy for an active fund. Active ETFs are extremely cheap,” said Calay. However, she was unsure if fees would fall further still.
“Yes there is a race to the bottom [on fees] but at the same time clients’ needs are evolving,” Calay said. “If their goals are more on the sustainable side their goal may not be the lowest-cost fund. They may have other factors in mind.”
