The ETF wrapper has proven popular with investors of all types, including institutional investors. Several features make ETFs particularly attractive in the institutional market. Chief among these are increased transparency and efficiency, both in terms of market access and operational set up. Additionally, institutional investors have historically faced considerable cost pressures, leading to a growing usage of ETFs, which are cost effective relative to other investment vehicles.
Given the flexibility of the ETF we’ve seen several use cases for ETFs in the institutional market in recent years:
▪ Strategic allocation: ETFs are used as core building blocks to allocate to a specific asset class or sector.
▪ Net-zero alignment and sustainability: ETFs are used in line with net-zero objectives.
▪ Transition management: ETFs are used to manage the transition from different managers or strategies.
▪ Liquidity and cash management: ETFs help maintain sufficient liquidity while investing cash reserves efficiently.
The active revolution within the ETF industry
So far, most institutional investors have accessed ETFs using passive strategies,
despite institutional investors favouring active strategies overall in their portfolios: according to the 2024 European Fund Selector Survey from Research in Finance, 56 per cent of strategies in institutional portfolios are active. With 67 per cent of surveyed investors being familiar with active ETFs or already allocating to them, we think it will only be a matter of time until institutional investors fully embrace active ETFs.
The ETF market has been growing at a 24 per cent compound annual growth rate (CAGR) globally over the past 10 years, but over the same period, the active ETF market has grown at a 51 per cent CAGR. While active ETFs still only hold 7 per cent of assets under management (as of 30 June 2024), they took in 25 per cent of net ETF flows in the first six months of this year. At the end of June, global assets under management in active ETFs were over $733 billion and there were more than 1,600 active ETFs available to investors.
How can institutional investors use active ETFs?
Institutional investors can use active ETFs in many of the same ways as passive ETFs:
▪ Strategic allocation: By replacing passive global equity ETFs with a large and liquid active global equity ETF, performance can be enhanced demonstrating value for money.
▪ Net-zero alignment and sustainability: Active sustainable equity and fixed income ETFs use fundamental ESG research and active stewardship with companies and issuers to improve sustainable outcomes.
▪ Transition management: Using an active ETF for transitioning between mandates offers the opportunity to enhance performance for the transitioning period.
▪ Liquidity and cash management: Active ultra-short income ETFs can help capture higher yield and manage risk at the same time.
J.P. Morgan Asset Management is the largest active UCITS ETF provider and offers institutional investors 25 active ETFs across equities and fixed income. Investors can easily allocate across equity regions, fixed income segments or core allocations to create the building blocks of a balanced portfolio.
Edward Malcom is head of ETF distribution UK, JP Morgan Asset Management
