Active ETFs: Impact on Fees and the Market Landscape

Transforming the Investment Landscape with Active ETFs

Active Exchange Traded Funds (ETFs) are transforming the investment landscape by highlighting a looming prospect of dwindling fees. Traditionally dominated by passive management, the European ETF market is seeing an influx of managers, eager to capitalize on active strategies. Currently, over 90 percent of assets in European ETFs are managed passively, a situation that underscores the growing competition from newly emerging active products.

Janus Henderson’s Active ETF Strategy

Janus Henderson, after acquiring fixed income ETF provider Tabula, plans to leverage its strong investment team to deliver attractive fee rates on active ETFs. The CEO noted the stark differences in fee structures between active and passive products, particularly emphasizing the favorable rates for ETFs.

• Active equity ETFs in Europe average 26 basis points compared to 112 basis points for active mutual funds.
• Fixed income active ETFs charge an average of 30 basis points versus 64 basis points for mutual funds.

Fees and Market Dynamics

Despite the lower pricing of active ETFs in Europe, analysts are observing a trend where newly launched ETFs tend to carry lower fees as a way to attract a broader investor base. Kenneth Lamont from Morningstar indicated that active ETFs often launch with competitive pricing compared to their mutual fund counterparts. This price sensitivity, combined with the value proposition of ETFs, poses interesting challenges for active fund managers.

Competition and Client Expectations

As active ETFs gain traction, the expectation for low costs becomes critical. Michael O’Riordan, an ETF consultancy partner, reiterated that while the rationale for balanced fees exists, client expectations are firmly entrenched in low-cost products. The fundamental question remains: can active ETFs deliver alpha to justify higher fees?

Conclusion: The Evolution of Fund Structures

The increasing globalization of ETFs, buoyed by low fees, is reshaping fund management and client preferences. While active ETFs may not yet command mainstream traction, their potential for innovation in the investment sector could redefine pricing strategies. The coming years will reveal whether active ETFs can deliver value and compete effectively against entrenched low-cost passive products.