Ever since the launch of the first exchange-traded fund in 1993, ETFs have evolved. From an initial focus on equities they now include bonds, and have moved from a passive to an active management style. Alongside the evolution, they have preserved two key features: comparatively low costs and transparency. This has earned ETFs the “You know what you have and what you’re going to get” moniker.
The resilience of ETFs across cycles has been key to the development of new products. One of the more recent developments, active ETFS, have seen seen their share of total ETF net flows increase fourfold over the past five years. While the segment accounted for only about 5% of the ETF industry in the US in 2022, it captured about 15% of net flows. In Europe growth has been slower, but can be expected to pick up as investors add ETFs to their portfolios.
Sustainable active ETFs
Another source of growth will be sustainable active ETFs. Ensuring that sustainability criteria are met involves more than just replicating an index. Assessing which companies can be included and where there might be potential controversies requires an active rather than a passive management style.
The lines between active and passive ETFs can anyway be blurry. This is the case when a strategy applies an optimisation approach for replication, where one buys a large proportion, but not all, of the components of an index to ensure diversification. Such a selection process is effectively a form of active management.
ETF assets under management (AUM) have risen by 16% annually over the last decade. Further investment in active ETFs is expected to contributed to a threefold rise in AUM from current levels, reaching USD 30 trillion by 2030.
The November 2022 BNP Paribas Asset Management European ESG ETF Barometer found that most investors questioned expected the European sustainable ETF market to continue to expand in 2023, with particular interest in low-carbon strategies and those aligned with the Paris Agreement.
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Please note that articles may contain technical language. For this reason, they may not be suitable for readers without professional investment experience. Any views expressed here are those of the author as of the date of publication, are based on available information, and are subject to change without notice. Individual portfolio management teams may hold different views and may take different investment decisions for different clients. This document does not constitute investment advice. The value of investments and the income they generate may go down as well as up and it is possible that investors will not recover their initial outlay. Past performance is no guarantee for future returns. Investing in emerging markets, or specialised or restricted sectors is likely to be subject to a higher-than-average volatility due to a high degree of concentration, greater uncertainty because less information is available, there is less liquidity or due to greater sensitivity to changes in market conditions (social, political and economic conditions). Some emerging markets offer less security than the majority of international developed markets. For this reason, services for portfolio transactions, liquidation and conservation on behalf of funds invested in emerging markets may carry greater risk.
Environmental, social and governance (ESG) investment risk: The lack of common or harmonised definitions and labels integrating ESG and sustainability criteria at EU level may result in different approaches by managers when setting ESG objectives. This also means that it may be difficult to compare strategies integrating ESG and sustainability criteria to the extent that the selection and weightings applied to select investments may be based on metrics that may share the same name but have different underlying meanings. In evaluating a security based on the ESG and sustainability criteria, the Investment Manager may also use data sources provided by external ESG research providers. Given the evolving nature of ESG, these data sources may for the time being be incomplete, inaccurate or unavailable. Applying responsible business conduct standards in the investment process may lead to the exclusion of securities of certain issuers. Consequently, (the Sub-Fund's) performance may at times be better or worse than the performance of relatable funds that do not apply such standards.