Most investors think of exchange-traded funds (ETFs) as a way to passively track an index, but actively-managed strategies in ETF structures are also gaining popularity for their convenience and ease of use. The active ETF market has grown rapidly, averaging around 40 per cent per annum in the five years through 2017.
Globally, investments in active ETFs and exchange-traded products (ETPs) reached a new high of US$95.9 billion in July 2018, according to independent research firm ETFGI. This was comprised of 524 ETFs/ETPs, from 104 providers on 18 exchanges.
Source: ETFGI; 2018 data goes up to July 31.
Australia is a fast-growing market for ETFs, and Fidelity International launched its first active ETF there on 5 November. Compared with active mutual funds, the key benefits for investors in active ETFs can include immediate and intraday execution, a simplified transaction process and the convenience of holding pooled investments in securitized form.
Investors may trade active ETFs through their brokerage accounts, as with individual stocks. This offers flexibility, such as the ability to buy on margin or make separate transactions throughout the day with real-time pricing. There are no subscription documents, minimum holding periods or minimum investment amounts.
Retail investors in Australia are well-acquainted with trading stocks in their brokerage accounts, with 37 per cent of adults holding listed securities. ETFs can allow investors to trade easily and quickly via digital means, rather than filling out lengthy subscription forms. The country’s total ETF market was nearly AUD40bn ($29bn) in July this year, up 33 per cent in 12 months, according to data from the Australian Securities Exchange.
The rising use of ETFs is supported by long-term growth in Australia’s pension assets, also known as Superannuation. The nation raising their mandatory contribution to 12% of salary by 2025 from 9.5% currently. Based on this and other factors such as demographics, Deloitte expects about 8% CAGR in Superannuation assets during 2015 through 2035.
Australia’s regulations also encourage the development of active ETFs, as local rules require less frequent portfolio disclosure in contrast to many other jurisdictions. For active strategies, high frequency disclosure requirements could erode a fund manager’s ability to generate alpha, impacting potential returns for investors in both listed and unlisted strategies; for investment managers the desire for portfolio transparency needs to be balanced with fiduciary duties to existing unit holders.
Regulators in other markets like Hong Kong are in discussions to consider potential requirements for active ETFs. In an August consultation with Hong Kong’s Securities and Futures Commission, the Asia Securities Industry & Financial Markets Association (ASIFMA) recommended not to require full and daily portfolio disclosure, citing similar reasons to the above.
Within the growing ETF universe, there are more actively managed products, which try to outperform an index or achieve some other investment objective. Fidelity International’s launch of an active ETF in Australia reflects the country’s growing demand among long term investors for new and innovative investment solutions.