Active fund managers have jumped into the index-based ETF space despite their long-held distaste for passive investments as more try to capitalize on the growth opportunity of this quickly developing investment vehicle.
For example, J.P. Morgan Asset Management, Fidelity International and Franklin Templeton are just some of the few traditionally active fund managers that are expanding their businesses into the passive, index-based ETF space as investor asset flows reveal an increasing preference for low-cost passive ETFs in response to underperforming and costly active strategies.
“We’ve seen a 21 per cent compound annual growth rate in international ETF flows in the past five years. If we didn’t do this there is a risk that we wouldn’t be participating in this market in the way that we would like to,” Bryon Lake, JPMorgan’s international head of ETFs, told the Financial Times.
“Passive investing is a trend that active managers like JPMorgan and Fidelity can no longer ignore,” Charles Younes, research manager at FE, told FT.
Howie Li, ETF Securities’ co-head of Canvas, a service that builds ETFs for asset managers, has seen more inquiries from active managers as established asset managers witness greater asset outflows and loss of clients in face of the changing investment landscape.
However, traditionally active managers have to be careful in the way they expand into index-based ETFs as their businesses have been built on espousing the benefits of active styles over passive investing.
“If you have spent years as an asset manager explaining why the active approach is good, and why you are using an active approach, say you are a value or a high-conviction investor, for example, you will have to come out with a product that reflects that. There is absolutely the risk of hypocrisy here, so firms have to be very thoughtful about what they launch,” Li said.
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Consequently, many active managers who are stepping into ETFs are also exploring alternative index-based strategies or smart beta options that eschew traditional market capitalization-weighted methodologies for strategies that look more like actively managed styles.
“The ETF is just a wrapper. Often you have a plain vanilla or market-cap weighted index put into an ETF but you can put all different kinds of investment types into an ETF wrapper,” Lake added.
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