Asian institutions join global swing to active ETFs

Actively managed exchange traded funds are gaining traction this year, with institutional investors in the Asia-Pacific region increasingly keen to invest in these products.

This comes after net inflows into all types of ETFs globally fell to $782bn in 2022 from $1.2tn in 2021, according to a new survey by Trackinsight, a financial technology and data provider.

But appetite for active ETFs has rebounded as investors are choosing alternative products to replace direct investing, index mutual funds and active mutual funds, according to the Trackinsight Global ETF Survey 2023.

Sean Cunningham, Hong Kong-based head of Apac ETF distribution at JPMorgan Asset Management, said investors in Apac and elsewhere were turning to active ETFs for better yields, greater diversification and increased liquidity for relatively low transaction costs.

A significant 30 per cent of year-to-date flows in the global ETF space had been into active strategies, Cunningham said, adding that this has been achieved despite the relatively low proportion of active ETFs available in the market — only about 5 per cent of the asset base is classified as such.

There had been an “explosion of assets” in JPMAM’s two largest active ETFs, the $25.2bn JPMorgan Equity Premium Income ETF and $24.7bn JPMorgan Ultra-Short Income ETF, due to flows from US investors and institutional investors in Apac, he added.

The JPMorgan Equity Premium Income ETF has returned 4.11 per cent year to date at net asset value and 5.79 per cent over the past 12 months, while the JPMorgan Ultra-Short Income ETF has returned 1.49 per cent this year and 3.02 per cent over the past 12 months.

“From what I know of Asia, in the 10 years I’ve been working out here, it is a very alpha-driven market. So in my opinion, active ETFs suit the Asian market as much as they suit any market globally,” said Cunningham.

In the Americas, 80 per cent of respondents say they would prefer to invest in an active strategy if it was packaged as an ETF rather than a mutual fund, according to the Trackinsight Global ETF Survey 2023.

Previously, many investors would view active ETFs as “high octane” with a high tracking error due to the small number of stocks in the portfolio, but that mindset is starting to change, Cunningham said. Investors see that the strategy of the products is not to go massively overweight on one sector or region, but just make “incremental adjustments here and there in line with research”.

“So you are able to add a bit of edge into portfolios without necessarily taking too much risk.”

Lower total expense ratios and management fees for active ETFs compared with other active products are also a driving force.

“There’s just more certainty in an ETF given you know exactly what your management fee is going to be throughout the year.”

For Apac investors especially, the possibility of intraday trading is one of the vehicle’s biggest selling factors.

“Asia clients can trade in Asia hours when the underlying market isn’t necessarily open . . . You’re able to get a price and get your risk on or off in eight hours before the underlying market has even started to trade.”

The larger number of ETFs, as well as liquidity and spread compression offered by active ETFs, also help attract more investors and greater flows into these products.

“I think clients need that extra liquidity when markets start to get a bit choppy. And we’ve definitely seen choppy markets over the last 24 months.”

These observations are backed up by other findings from data provider Trackinsight’s Global ETF Survey 2023, which highlights the growing investor interest in all types of ETFs, despite a slowdown in net inflows last year.

A significant percentage of the survey’s global respondents are planning to increase their exposure to equity and fixed-income-related strategies this year, at 56 per cent and 40 per cent, respectively.