Investing in active ETFs, diversifying: “These funds are now worth $10,270 billion.”

The spectrum of exchange-traded funds is expanding and is not limited to index funds. Traditionally, ETFs (exchange-traded funds) are associated with passive management. They then link to trackers, i.e., stock exchange-listed funds that track (monitor) stock market indices. However, there are many different products within this product range. There are passive ETFs, smart beta ETFs, and active ETFs. Active ETFs are actively managed funds that are publicly traded, just like passive ETFs. Thus, the terms ETF and passive management are not synonymous.. View from Olivier Paquier, Head of ETF Europe, Middle East and Africa at JPMorgan Asset Management.

Strong supply and demand

We are currently witnessing a real ETF craze. “This is more of an acceleration than an evolution. The first ETFs appeared in the 1990s in the United States. At the end of 2021, there were 9,877 ETFs listed on the stock exchange. an asset class that is now worth $10.27 trillion.‘, says Olivier Paquier.

This acceleration in demand for ETFs is mainly due to three factors. The first factor concerns the demand for innovation. Investors are demanding more accurate and innovative exposure tailored to them. These include themed investments, active ETFs, or registered ESG funds.

The other two factors are supply-side. Indeed, product offerings are meeting this demand with a growing number of ETFs aligned with the European Union and Paris climate change benchmarks, or products linked to specific annual targets to reduce greenhouse gas emissions. “For active ETFs, the offering is also being adapted with products that outnumber active mutual funds in 2020 and 2021. Net sales of active ETFs have been impressive, with net flows in 2021 nearly three times what they were in 2019.“, says Olivier Paquier.

Benefits and Myths Dispelled

What are the benefits of active ETFs? The fact that these funds are listed on the stock exchange gives them greater transparency and greater liquidity. “At any time, you can find out the total, exact and daily composition of your fund. These ETFs are also very flexible. They offer the possibility of multiple listings, multiple stock classes, currency risk and hedging. Their cost structure is not much different from that of passive ETFs. They allow you to outperform the indices through effective risk and return management.”emphasizes this manager.

Contrary to what one might think, these active listed funds are not only demonstrating their interest in limited markets. They also perform well in broader markets such as the Eurozone, Asia and emerging markets, or even a global index for example.

Another myth is that this type of ETF is only used by a limited number of investors. “However, we see this asset class present in the portfolios of institutional investors, insurance companies, pension funds, as well as individual investors.adds Olivier Paquier.

Thus, these funds take their place in portfolios as diversification tools. They are not “clones” of traditional house manager funds. They allow you to increase the liquidity of the portfolio while generating alpha (yield). It is also a way to integrate the ESG concept into the portfolio. The range of ETFs using the ESG approach is only getting stronger. Thus, active registered funds can be part of diversified portfolios with a long-term perspective. It should also be noted that at JP Morgan AM, these active ETFs do not practice securities lending.

Check also on MoneyStore:

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– ETFs and trackers: between a priori and delusions

– Under the magnifying glass: which management style performed best in 2021? Active or passive?