Active ETFs
The ETF buyers’ guide
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3
J.P. Morgan Asset Management
2
The ETF Buyers Playbook to Active ETFs
2
The ETF Buyers Playbook to Active ETFs
4
What is an active ETF?
6
Demand for active ETFs
8
Types of active ETFs
10
Why invest in active ETFs?
12
Trading active ETFs
14
Liquidity of active ETFs
16
ESG: the active advantage
18
Due diligence for active ETFs
20
Finding the right active ETF provider
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Active ETFs & asset allocation
24
J.P. Morgan Asset Management
– actively leading the ETF space
Contents
Demand for active exchange-traded funds (ETFs) has grown significantly
in recent years. Global assets under management are now at USD 565 billion,
which is a sharp increase from only USD 122 billion five years ago.
1
This growth is likely to continue. According to the 2023 Global ETF Investor Survey from Brown Brothers
Harriman, 39% of investors globally are planning to increase their active ETF allocation. However, in our
conversations with clients, we still see many misconceptions about active ETFs. For this reason, we have
created this guide to serve as an educational resource.
1
Source: Bloomberg; Data as of 29 December 2023, US & UCITS only. Image: Shutterstock.
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J.P. Morgan Asset Management The ETF buyers guide to active ETFs
The ETF is just a wrapper and the content itself is independent of the vehicle
Passive
Strategic
Beta
Active
ETFs Funds Separate
Vehicle agnostic Vehicle agnostic
=
Passive
Strategic
Beta
Active
ETFs Funds Separate
Vehicle agnostic Vehicle agnostic
=
Source: J.P. Morgan Asset Management. For illustration purposes only. The ETF aims to replicate the performance of an index however its market price can be different
from its net asset value and from the net asset value of the index.
What is an active ETF?
•
When looking at active ETFs, it is first important to note that terms such as “ETF”, “passive” and “index” are not
synonymous. ETF simply means Exchange Traded Fund, which means an ETF is traded at an exchange regardless
of the investment strategy used.
•
A variety of “engines” or strategies can therefore be placed in the ETF structure to leverage its benefits.
•
“Active” refers to specific investment decisions, which are designed to achieve specific outcomes, such as
outperforming an index (Alpha), generating income, or achieving control in terms of duration, yield or credit quality.
•
An active ETF provides access to these specific outcomes, all while maintaining the attributes of the ETF structure.
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J.P. Morgan Asset Management The ETF buyers guide to active ETFs
Demand for active ETFs is growing
Global active ETFs assets by year ($bn) Percentage of portfolio invested in actively managed ETFs
58
86
122
198
321
377
565
2017 2018 2019 2020 2021
2022 2023
0%
10%
20%
30%
40%
50%
60%
70%
80%
0% 1%–5% 6%–10% 11%–20% 21%–40% More
than 40%*
2020 2021 2022 2023 2024
Source: (left) Bloomberg; Data as of 29 December 2023, US & UCITS only. (right) TrackInsight Global ETF Survey 2024.
Demand for active ETFs
•
Active ETF assets have grown sharply in recent years. At the end of 2017 the global assets under management were
only at 58bn US dollar, growing to 565bn US dollar end of 2023.
2
•
The share of active ETFs in investors’ portfolios has risen steadily over the past five years. According to the
Trackinsight Global ETF Survey 2024, which has insights from over 500 ETF buyers globally, over 80% of these
investors now use active ETFs in their portfolios.
•
So far, active ETFs make up only 2% of the UCITS ETF market
2
, but this share is likely to rise if growth follows the
same trajectory as we are witnessing in the US today.
•
While passive strategies continue to dominate European ETF inflows, investors are increasingly realising that the
ETF wrapper is also an ideal home for actively managed strategies: 39% of European investors recently said that
they expect their exposure to active ETFs to increase over the next 12 months.
3
•
Active management in an ETF wrapper is one of the factors that will drive further ETF growth, as active ETFs provide
investors with the opportunity to earn alpha on their investments and retain all the benefits that they expect from
the ETF structure.
2
Bloomberg; Data as of 29 December 2023, US & UCITS only.
3
Brown Brothers Harriman, Global ETF survey 2023.
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J.P. Morgan Asset Management The ETF buyers guide to active ETFs
Types of active ETFs
•
The first active ETF was launched in 2008. Since then, a lot of innovation has happened in the active ETF market.
•
There are now 19 ETF issuers offering active ETFs – a number that has tripled over the last five years.
•
In 2023 equities overtook fixed income as the largest asset class for active ETF allocations, with 56% of UCITS active
ETF assets aligned to equity strategies.
4
•
The active ETF market is already as diverse as the active mutual fund market, ranging from index-like active
research enhanced indexing strategies, to higher tracking error unconstrained or even thematic strategies.
Active UCITS ETF: a market overview
Active UCITS ETF market by asset class, in mn
19 ETF providers oering
actively managed ETFs
Assets under Management
32bn USD
94 active UCITS ETFs
55 Article 8 SFDR ETFs
13 Article 9 SFDR ETFs
Other
Equity
Fixed income
2022 20232021202020192018
0
5000
10000
15000
20000
25000
30000
35000
Source: Bloomberg as of 29 December 2023.
4
Source: Bloomberg as of 29 December 2023.
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J.P. Morgan Asset Management The ETF buyers guide to active ETFs
Why invest in active ETFs?
•
Active ETFs offer the same benefits of the ETF wrapper as passive ETFs. Active ETFs are cost effective, offer daily
holdings transparency, can be traded throughout the day at a known price and offer access to virtually every
market worldwide.
•
Additionally, active ETFs bring expert research and security selection to ETF investors. Active security selection can
identify dislocations in the market and focus on alpha generation.
•
Adding active ETFs to an ETF allocation also brings diversification benefits – in terms of the ETF providers
themselves and with regards to the sources of return within a portfolio.
•
Traditionally it has been more expensive to access active research capabilities and strategies in the mutual fund
wrapper. The ETF wrapper now gives more cost-efficient access to these active capabilities.
Actively managed ETFs in focus
Cost
eciency
Gain ecient
access to precise
market exposures,
suite logic
Flexibility
Possibility to multiple
listings, multiple
share classes,
currency-hedge
exposures
Liquidity
intra-day trading
and real-time price,
multiple counter-
parties per
ETF listing
Full transparency
Disclosure regulations
for publishing portfolio
holdings/tracking
basket on a daily
basis for UCITS
ETFs
Potential for
outperformance
Alpha potential
from active
investment
decisions
Active risk
management
Prompt
adjustment to
rapid market
shifts
Professional
oversight
Insights from
experienced portfolio
managers and
research
analysts
Active ETF
The value of investments may go down as well as up in response to the performance of individual companies and general market conditions. Active risk management
process includes an effort to monitor and manage risk, but does not imply low risk.
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J.P. Morgan Asset Management The ETF buyers guide to active ETFs
Trading active ETFs
Trading active ETFs is the same as trading passive ETFs. There are three methods: NAV trading; risk trading; and
agency trading.
•
NAV trading is where the dealer and client agree to trade the ETF at a price that is tied to its future net asset value
per share. The price is usually quoted as NAV plus or minus basis points (bps).
•
Risk trading is a common alternative to NAV trading. It involves the client requesting an intraday price from one or
more brokers that it can act upon immediately. Investors can get price quotes any time during the trading day.
Quotes have two parts: bid and ask. The bid is the highest price a buyer is willing to pay for ETF units. The ask is the
lowest price a seller is willing to accept to sell units. The difference between the two is called the bid-ask spread.
This method of trading may be advantageous to clients looking to execute orders quickly at one price.
•
Agency trading is where the client employs a broker to act on their behalf in order to trade the ETF in the secondary
market (via the stock exchange or over the counter). This method is similar in execution to risk trading. The client,
rather than the broker, bears the market risk.
Ways to trade active ETFs
On Exchange Trading
An ETF’s average daily volume
(on screen liquidity is not the extent of its liquidity).
OTC Trading
Liquidity can also be sourced over-the- counter in the secondary
market by execution strategies, such as NAV and Risk trading.
Primary Market
New shares of the ETF can be created by designated
institutional investors accessing the underlying
securities market.
Increasing liquidity
Source: J.P. Morgan Asset Management.
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J.P. Morgan Asset Management The ETF buyers guide to active ETFs
Liquidity of active ETFs
•
Fundamentally, the liquidity profile of any ETF is driven by its underlying securities. In other words, the primary
market costs of similar active and passive market exposures should be the same, as they incur very similar
commissions, taxes, and other charges.
•
The components of the bid-offer spread are the same for both active and passive strategies – for example, they
have the same brokerage fees, taxes, currency/hedging costs and creation/redemption costs.
•
The tightening of ETF spreads within the primary market creation/redemption cost is a factor of volume, velocity
and diversity of the client base.
•
Commonly, the oldest and largest passive ETFs have tighter spreads. For active ETFs, we expect spreads to evolve
over time as the adoption of active ETFs increases. Similar developments can already be noticed for relatively new
ESG/Sustainable ETF strategies, as more clients adopt these products.
•
In general, a tighter bid-ask spread means the ETF is more liquid, which means the cost of buying and selling the
ETF is lower.
•
In the US, where active ETF adoption is higher and more trading takes place on exchange, there are several
examples where active ETF spreads are on a par with passive ETFs.
What goes into an ETF price?
Spread
•
Market Maker fees
•
Creation Costs
• Forex Hedging Costs
• Taxes
• Brokerage Fees
•
Underlying Bid/Ask
•
Brokerage Fees
• Taxes
• Forex Hedging Costs
• Redemption Costs
• Market Maker P&L
Underlying NAV
ETF Spread
Oer price
Bid price
Source: J.P. Morgan Asset Management.
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J.P. Morgan Asset Management The ETF buyers guide to active ETFs
ESG: The active advantage
•
Over USD 38 billion flowed into ESG ETFs in 2023 equating to 23% of overall ETF flows.
5
We expect ESG funds to
continue growing through 2024, and well beyond.
•
The UCITS ESG ETF market has reached USD 307 billion in assets.
5
•
When it comes to ESG ETFs, combining the benefits of ETFs with active management can be particularly
advantageous.
•
Passive ESG ETFs typically apply exclusions or, if a sharper ESG focus is required, they track ESG indices such as
socially responsible investment (SRI) or Paris-aligned benchmarks. As a result, investors are fully reliant on the
ESG analysis of these index providers.
•
Unlike passive index investing, an active approach allows for a more in-depth assessment of ESG characteristics.
While some index trackers use exclusions alone to reflect investors’ sustainability preferences, exclusionary
strategies will only help investors mitigate ESG risks by avoiding companies with the worst ESG attributes. As a
result, investors who are looking to invest in companies with strong ESG practices, or to capitalise on sustainable
opportunities, will need to look beyond exclusions alone.
•
According to the 2024 Trackinsight Global ETF Survey, many investors have already realised the benefits of
combining ETFs and active management for ESG, with 48% using active investment approaches for ESG
investing - either as purely active or in combination with passive ETFs.
48% of ETF buyers use active strategies for ESG investing
What is your preferred investment approach for investing in ESG ETFs?
PassiveActive Combination of both
0%
10%
20%
30%
40%
50%
60%
24%
24%
51%
Source: 2024 Trackinsight Global ETF Survey.
ESG determinations may not be conclusive and securities of companies/issuers may be purchased and retained, without limit, by the Asset Manager regardless of
potential ESG impact. The impact of ESG integration on a Fund’s performance is not specifically measurable as investment decisions are discretionary regardless of
ESG considerations.
5
Source: Bloomberg, as of 31 December 2023.
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J.P. Morgan Asset Management The ETF buyers guide to active ETFs
Due diligence for active ETFs
•
Active ETF strategies are still relatively new in Europe, so not every investor has experience of the active ETF due
diligence process.
•
Clients tend to approach the active ETF due diligence process in two ways, either from the perspective of a passive
ETF research team, or from the perspective of an active mutual fund research team. Both approaches make sense,
but due to the background of these research teams there are a few crucial factors specific to active ETFs that will
need to be focused on.
•
If passive ETF research teams have not previously reviewed active strategies, it might make sense to partner with
their active research counterparts for mutual funds and benefit from their experience in the active space.
•
If active mutual fund research teams oversee the due diligence, it makes sense to pay attention to specific ETF-
related topics, such as spreads, liquidity or potential tax benefits.
•
As one of the largest active ETF providers globally, our experience suggests that the due diligence process is
usually most effective if it’s driven by an active research team with broad input from passive ETF specialists.
Active ETF due diligence: a team effort
Active ETF
Due
diligence
Active Mutual Fund
Research teams
• Investment strategy
• Historic results
• Investment capabilites
Passive ETF
Research teams
• Liquidity
• Spreads
• Tax benefits
Source: J.P. Morgan Asset Management.
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J.P. Morgan Asset Management The ETF buyers guide to active ETFs
Finding the right active ETF provider
•
When selecting an active ETF provider, it is of course important to look closely at the strategy itself. However, the
capabilities and resources of the ETF provider are also crucial.
•
The most relevant aspect to check is the resources of the ETF provider. Research insights are crucial for active
ETFs; therefore, an active ETF provider should have a global network of analysts and portfolio managers.
•
As an example, if you are considering active emerging market ETFs, it is paramount that the ETF provider has local
resources on the ground with local language skills who do their own research and do not purely rely on sell-side
analysis.
•
Finally, the ETF provider should have a well-resourced capital markets team, backed by a strong technology
platform and solid relationships with a diversified set of authorised participants (“APs”). The ETF provider must be
able to demonstrate that it can provide APs with all the information they need to deliver efficient pricing of the ETF
at all times, while using both primary and secondary markets to boost liquidity.
J.P. Morgan Asset Management’s global investment capabilities
Source: J.P. Morgan Asset Management; as of 31 December 2022.
*JPMAM employee in location.
6
Data is updated annually; as of 30 December 2022.
Americas EMEA APAC
Boston
Chicago
Columbus
Dallas
Houston
Indianapolos
Jersey City
Los Angeles
New York
Pittsburgh
San Francisco
Sao Paulo
London
Paris
Geneva
Stockholm
Frankfurt
Hong Kong
Mumbai
Seoul
Shanghai
Singapore
Sydney
Taipei City
Tokyo
1,300+
Portfolio managers,
investment
specialists, traders
and research
analysts*
600+
Strategies
managed on our
Spectrum platform
6
2,500+
Annual onsite
company visits
6
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J.P. Morgan Asset Management The ETF buyers guide to active ETFs
The role of active ETFs in asset allocation
•
Passive and active ETFs can complement each other by providing an attractive balance between risk and return.
•
Passive as well as active ETFs share similar risks in terms of performance, since both investments might go down
as well as up in response to the performance of individual companies or general market conditions.
•
Active ETFs introduce higher tracking error risk, but they can help investors generate alpha for a portfolio
alongside core passive holdings. Active ETFs can also be used for tactical allocations at different times through the
market cycle.
•
Looking at the Trackinsight Global ETF Survey 2024, it is clear that investors are increasingly using active ETFs to
replace or complement passive allocations, and also as a substitute for active mutual funds or direct investing.
Have you ever used an actively managed ETF to replace...?
20222021 2023 2024
0%
10%
20%
30%
40%
50%
60%
Passive ETF Active fund None of the above/other Direct investing Index fund
41%
29%
32%
27%
35%
33%
38%
48%
35% 35%
29%
24%
30%
33%
29%
43%
28%
25%
22%
25%
Source: TrackInsight Global ETF Survey 2024.
2524
J.P. Morgan Asset Management The ETF buyers guide to active ETFs
The J.P. Morgan ETF platform
170bn+ USD global Assets
under Management and more than
80 ETFs globally
#1 active UCITS ETF provider 25bn+ USD Assets under Management
inUCITS ETFs
30+ UCITS ETFs
with over 70 share classes
across 5 currencies
Largest active
UCITS ETF range
Active ETF of the Year (JREU)
ETF Stream Awards 2023
Best Active ETF Provider 2024
ETF Express European Awards
Past performance is not a reliable indicator of current and future results.
Source: J.P. Morgan Asset Management, Bloomberg as of 27 March 2024, ETF Express.
J.P. Morgan Asset Management: Advancing the potential of ETFs
•
J.P. Morgan ETFs are rigorously designed to push the boundaries of ETF investing so that investors can build
diversified, competitively priced portfolios.
•
J.P. Morgan Asset Management launched its first UCITS ETF in November 2017. Since then, we have brought many
innovations to the ETF market – from our successful Research Enhanced Index Equity strategies which now
consists of ten ETFs, to the launch of the industry’s first active China equity and UK equity ETF, as well as a UCITS
global equity version of the world’s largest ETF. Our active ETF solutions tap directly into our global investment
capabilities and the expertise of our specialist investment teams.
•
J.P. Morgan Asset Management is the number 1 provider for active ETFs in the UCITS space and one of the largest
globally.
7
We have also been named “Best Active ETF Provider (USD 500 million +)” by ETF Express and got awarded
“Best Active ETF” at the 2023 ETF Stream Awards.
Past performance is not a reliable indicator of current and future results.
7
Source: Bloomberg as of 31 December 2023.
26
The ETF buyers guide to active ETFs
Notes
This is a marketing communication. The views contained herein are not to be taken as advice or a recommendation to buy or sell any investment or interest thereto.
Reliance upon information in this material is at the sole discretion of the reader. Any research in this document has been obtained and may have been acted upon by
J.P. Morgan Asset Management for its own purpose. The results of such research are being made available as additional information and do not necessarily reflect the
views of J.P. Morgan Asset Management. Any forecasts, figures, opinions, statements of financial market trends or investment techniques and strategies expressed are,
unless otherwise stated, J.P. Morgan Asset Management’s own at the date of this document. They are considered to be reliable at the time of writing, may not necessarily be
all inclusive and are not guaranteed as to accuracy. They may be subject to change without reference or notification to you. It should be noted that the value of investments
and the income from them may fluctuate in accordance with market conditions and investors may not get back the full amount invested. Past performance and yield are
not a reliable indicator of current and future results. There is no guarantee that any forecast made will come to pass. J.P. Morgan Asset Management is the brand name
for the asset management business of JPMorgan Chase & Co. and its aliates worldwide. To the extent permitted by applicable law, we may record telephone calls and
monitor electronic communications to comply with our legal and regulatory obligations and internal policies. Personal data will be collected, stored and processed by
J.P. Morgan Asset Management in accordance with our EMEA Privacy Policy www.jpmorgan.com/emea-privacy-policy. This communication is issued in Europe (excluding UK)
by JPMorgan Asset Management (Europe) S.à r.l., 6 route de Trèves, L-2633 Senningerberg, Grand Duchy of Luxembourg, R.C.S. Luxembourg B27900, corporate capital EUR
10.000.000. This communication is issued in the UK by JPMorgan Asset Management (UK) Limited, which is authorised and regulated by the Financial Conduct Authority.
Registered in England No. 01161446. Registered address: 25 Bank Street, Canary Wharf, London E14 5JP.
Cover image: GettyImages-480203828
JPM54675 | 01/24 | 09ab221212093730
THIS IS A MARKETING COMMUNICATION. PLEASE REFER TO THE PROSPECTUS AND TO THE KID OR
KIID BEFORE MAKING ANY FINAL INVESTMENT DECISIONS. FOR INSTITUTIONAL AND PROFESSIONAL
INVESTORS ONLY – NOT FOR RETAIL USE OR PUBLIC DISTRIBUTION
