Actively Managed ETFs and Share Classes Are Helping to Modernize the Fund Industry

In the past, the fund industry was pretty strictly divided. On the one hand, there were exchange-traded funds, known as ETFs, with their passive investment strategies, and on the other hand, there were mutual funds that pursued an active management approach to beat their benchmarks. However, even among mutual funds, there were index funds—mutual funds that passively track an index, which have been available for a long time.

As exchange-traded funds became increasingly popular with investors and their assets under management rushed from one record to the next, the mood in the market became harsher, and the name ETFs became synonymous with passive investing. Even though attempts to discredit ETFs were unsuccessful, it should be noted that ETFs as such are merely a distribution wrapper that, like mutual funds, are regulated under local regulations, like the UCITS Directive in the European Union.

With the launch of the first actively managed ETFs and later ETF share classes of actively managed mutual funds, the world has changed for critics of ETFs. Suddenly, ETFs can no longer be used as a synonym for passive products. As the first active ETFs quickly came to manage significant assets, critics needed new arguments.

Initially, it was tempting to point out that actively managed ETFs were not managed as actively as their name suggested, since these exchange-traded funds were subject to rather strict rules that allowed only minor deviations from their benchmark indices.

This argument became redundant when the first genuinely actively managed ETFs with and without a benchmark index were launched. In addition, an increasing number of providers of actively managed mutual funds were publicly announcing their plans to launch actively managed ETFs. These providers are now being accused of simply wanting to profit from the trend towards ETFs. But are these accusations correct?

Sure, any fund or ETF promoter wants to gather assets and is therefore not shy to take profit from market trends. That is how the industry works. Nevertheless, the launch of active ETFs or ETF share classes of actively managed mutual funds is, from my point of view, the next logical step to evolve the business. Every year, hundreds of new investment funds are approved for distribution in Europe and other markets.

When launching funds, it is right for providers to adapt to customer demand and bring new products to market in the most promising distribution wrapper. It could, therefore, be said that providers of actively managed mutual funds who issue their products as ETFs or with an ETF share class have begun to modernize their product ranges in terms of the distribution wrappers in which they offer their products to reach as many investors as possible. That said, it remains to be seen whether the investment strategies of the new products will be successful, but one thing is clear: this won’t have anything to do with the distribution wrapper.