JEPI - Actively Managed ETFs: Growing At The Expense Of Mutual Funds And Passive ETFs

2023-12-22 07:14:58 ET

Summary

• Interest in actively managed ETFs has largely shifted from being centered on bond markets to equities. 2023 was yet another successful year of positive growth for active ETFs.
• Europe, typically 5 years behind the U.S. in demand evolution, has shown a significant uptick in investor interest in active products while China leads over both the U.S. and Europe.
• The interest in active ETFs comes amidst declining demand and traded volumes for many listed "passive" ETFs.
• With market breadth shot and index directionality limited to a handful of stocks, cheap access to high-quality manager-driven strategies are the driving factor behind the surging demand seen in 2023.

In the world of Exchange Traded Products (ETPs), an entire plethora of "passive" Exchange Traded Funds (ETFs) - instruments that track a broad and/or diversified index of securities - has attracted well over nine trillion dollars in Assets Under Management ((AUM)) by 2022. In 2023, however, trends indicate that "active" ETPs - wherein a team of investment managers dynamically pick and rebalance allocations for a publicly-available fund - are growing by leaps and bounds.

Global Trends

Any talk about "active" ETFs (or simply "active products") might remind a casual follower of market news the name Cathie Woods whose company has launched the Ark Fund Series. Each of these Funds follow a specific theme and are managed using proprietary methodologies that are not linked to any index. However, the fact is that active ETF structures were predominantly employed by issuers of bond-specific products/strategies before these were issued. Between 2017 and 2022, however, this trend showed a definitive change :

Active products closed out 2022 with a 5-year growth rate of 580% and equities-driven active products in the lead. Given that active ETPs directly compete with the likes of mutual funds - which has over $11.3 trillion in AUM as of end of 2022 - there is plenty of room to grow.

By the half-year mark of 2023, it was determined that over 96% of U.S. equity ETF inflows were into active products:

Despite this, they only accounted for 3.2% of total U.S. equity ETF AUM, suggesting another possible dimension for growth.

In this year's Global ETF Survey by Brown Brothers Harriman - which surveyed 325 professional investors - over 42% of all respondents indicated that they will be shedding holdings in index mutual funds in favour of holding positions in active products.

Overall, the highest rate of reported adoption was among respondents in the "Greater China" region, thus seemingly underlining the idea that investors in Asia are generally more receptive to new ideas and asset classes than their European (and even American) counterparts.

Broadly, 76% of European respondents and 88% of Greater China respondents indicated that they will be either increasing or maintaining their holdings in active products.

American respondents straddled the middle at 83%.

These findings are largely resilient across survey pool size. For example, industry publication ETF Stream partnered with J.P. Morgan Asset Management to survey 66 professional investors in Europe with regard to their outlook. 70% of respondents reported that they intend to currently use and maintain, currently use and increase or start to allocate capital to active products in 2024.

For active issuers, Europe has emerged as a battleground of interest. As of the end of Q3 2023, data from ETFbook indicates that the number of active ETPs launched has consistently outstripped the number of index-based ETPs launched throughout the year.

Europe-listed "active" ETPs have seen a five-fold increase from 2015 to Q3, going from just $6.1 billion to over $29 billion in AUM.

As of end of November, it was reported that total global AUM in active products hit US$700.4 billion, representing a 44% Year-on-Year (YoY) increase. In the Year Till Date (YTD), equity-focused active products gathered net inflows of $111.96 billion, a nearly 45% increase over the same period in 2022. Fixed Income-focused active gathered $54.34 billion in net inflows in the YTD, a nearly 158% increase over the same period in 2022.

As of November, there are 2,383 active products offered by 415 providers and listed on 36 exchanges in 27 countries around the world. As of at the time of writing, a vast bulk of these products (accounting for a little over $520 billion ) are U.S.-focused.

The JPMorgan Equity Premium Income ETF ( JEPI ) and the PIMCO Enhanced Short Maturity Active ETF ( MINT ) respectively represent two of the largest growing segments in the active product space even in Europe. As of Q3, just two issuers - J.P. Morgan Asset Management ( JPM ) and PIMCO - account for over 48% of all AUM held in active products.

However, with a little over 100 active broad-based products currently in operation in a universe of more than 1,800 UCITS ETFs, there is plenty of room for issuers to build out an increasingly larger array of products.

At least part of this shake-up in Europe is attributable to the glut of "passive" offerings not being completely aligned with investor objectives for efficient manager selection and performance. As per data from Jane Street, over half of the 11,925 ETF listings (i.e. not just UCITS-certified) in the Continent trade less than 10 times a day while just 11% have more than 100 executions a day on average. This strongly suggests that Europe's investors are looking for more than what is made available via "passive" investment styles.

Europe is especially interesting for another reason: over 80% of the European ETF market is driven by institutional investors. A successful outreach among a relatively small number of institutional investors - as opposed to a massive number of retail investors divided across countries, regions and languages - have tended to go a long way in promoting adoption and AUM growth.

Many professional investors generally consider the European market to be five years behind the U.S. in terms of demand evolution. Given the massive success clearly evident in the U.S., the potential for ramped-up investor attention and capital in Europe is increasingly being considered worthy of attention by issuers.

In Conclusion

Asset managers have long struggled with the challenge of attracting capital the launching of a strategy: as it used to stand, an active strategy demanded a mutual fund structure and its resident complications. The alternative - the ETF structure - had its own set of difficulties: industry precedents heavily favoured a "passive" index-tracking model (of which there were legion) which created a long time lag in drumming up attention and AUM.

However, the latest trends in active product issuances and their massive success in both the U.S. and Europe - which has also been attracting investments from Asia - is proof positive that investors (both retail and institutional) see the benefit in the middle path between mutual funds and traditional "passive" ETFs being afforded by active ETFs.

Given that market breadth is largely due to continue to suffer for at least two quarters of 2024 (as highlighted in the previous article), retail investors would do well to consider active products. It has never been easier and cheaper to access sophisticated strategies.

Some products of interest are listed in the Top 10 chart (i.e. the likes of JEPI and MINT) but any investor would also do well to carefully study the value propositions touted by the vast number of vividly different issuers prior to making an investment decision.

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