GlobalData Plc

Active ETFs to gain further ground in the HNW space

Actively managed ETFs are rapidly growing in popularity, and the HNW segment is not immune to this trend. Clearly, this is a trend wealth managers cannot afford to ignore.

Actively managed exchange-traded funds and products (ETFs and ETPs) are still considered niche but they are a rapidly growing segment of the broader ETF universe. According to ETFGI, assets invested in actively managed ETFs and ETPs listed globally reached a new record high of $47.5bn at the end of February 2017.

This trend is not limited to the retail and institutional segment, and our research shows that ETFs in general have long found their way into the typical HNW portfolio. Back in 2014, HNW investors globally allocated 16.8% of the equity holdings to ETFs. This proportion rose to 17.9% in 2015, to reach 19.7% in the following year.

However, by solely following a passive investment strategy, traditional ETFs have a crucial flaw. Private banks and wealth managers often try to make a name for themselves by promoting investments that are able to beat the market – a trait that by definition is impossible for traditional ETFs. In fact, our data shows that wealth managers believe that mutual funds yield better returns than traditional ETFs. With a team or portfolio manager making decisions on the underlying portfolio allocation, actively managed ETFs overcome this flaw.

Yet according to our data, a significantly larger share of HNW equity investments is still held via mutual funds rather than ETFs. The same holds true for bond, commodity, and alternative investments. However, as the actively managed ETF market matures, we expect further uptake in the HNW space, given the possibility of outperforming the market. This trend will be aided by increased market volatility on the back of recent political and economic challenges.

Wealth managers surveyed by GlobalData agree that HNW investors are looking for capital appreciation opportunities amid turbulent market conditions, hoping to take advantage of cheap buying opportunities. Simply tracking the market or an index and delivering beta, traditional ETFs are not suited to achieving this. While actively managed mutual funds provide an alternative in this context, they have the highest of mutual fund management fees and are less liquid. Mutual funds can be redeemed at the end of each trading day, while ETF shares are traded throughout the day, an important trait in times of strong market volatility.

This means that actively managed ETFs are well on track to attract more HNW funds. Being more liquid, and often charging lower management fees while still being able to provide investors with alpha, we expect actively managed ETFs to gain the upper hand over mutual funds in the battle for HNW funds.

By Heike van den Hoevel, Senior Wealth Management Analyst

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