Asset managers are tumbling over each other to launch active ETFs in Europe, but the assets mainly go to one party: JPMorgan. Despite critics doubting the added value of active-ETFs, the US bank is proving that alpha is possible.
Some 80 per cent of all ETF launches last year were active ETFs: 510. In Europe, one party dominates the market: JPMorgan Asset Management. The asset management arm of the US major bank manages 65 per cent of its assets in active ETFs, Morningstar Direct data show. Fidelity and Pimco follow at a distance with 12.6 and 9 per cent market share, respectively.
According to a report published by JP Morgan Asset Management for the third quarter of 2024, more than $50 billion in assets are in active UCITS ETFs. Almost $27 billion is deposited with JP Morgan AM (which has been offering them since 2018), number two is Fidelity with $5.7 billion, number three Amundi with $5.3 billion.
Combination active and ETF
Active ETFs combine an active strategy with the lower cost structure and tradability of an ETF. The appeal lies in the idea that active managers can beat the tracked benchmark.
Some funds succeed in this, such as the most popular active ETF in Europe, the €12.8bn JPMorgan US Research Enhanced Index Equity (ESG) UCITS ETF. Investors pay 20 basis points a year for it, and the fund achieved an average return of 16.36 per cent a year over the past five years.
That is 71 basis points more than the 15.62 per cent produced by the largest passive alternative: the iShares Core S&P 500 UCITS ETF. For that fund, investors pay 7 basis points a year.
Of the five largest active ETFs listed in Europe, three are managed by portfolio manager Raffaele Zingone in New York, and his colleague Piera Grassi in London. Unlike other European active ETFs, Zingone and Grassi’s choices are not quantitative, but fundamentally driven.
Holdings
An analysis of the holdings shows that the differences between the ‘ordinary’ and active ETFs are small. The weighting of the Magnificent Seven in the active ETF is 51 basis points higher than the iShares ETF. Companies such as Mastercard, Visa and Bank of America also have a higher weighting in JPMorgan’s fund.
Holdings per 23 January 2025
Traditional defensive stocks such as Walmart, Home Depot and Procter & Gamble are underweight in the active ETF. And of the Magnificent Seven, Netflix has the largest relative underweight at the time of writing.
An important detail is that the fund tracks only half of the stocks in the S&P500, which may contribute to returns.
‘A trick’
Still, active ETFs are regularly criticised. The product is said to be nothing more than a new marketing ploy by asset managers to get out from under falling margins with a higher management fee.
Stuart Kirk, former portfolio manager at HSBC, calls it ‘a trick’. According to Kirk, the differences with passive variants are minimal and in any case not enough to generate the outperformance offered and thus justify the higher fees, he wrote in the FT last week.
He examined the differences between the active iShares World Equity Enhanced ETF and its passive counterpart, the iShares Core MSCI World. Despite a slightly higher expense ratio (0.3 per cent vs 0.2 per cent), the active ETF has almost identical stocks in similar proportions, making the label ‘active’ questionable, according to Kirk.
The biggest deviations, such as slightly greater exposure to Bank of America, are marginal. Similarly, supposedly undesirable stocks like Berkshire Hathaway and Visa remain in the portfolio, only in slightly smaller amounts.
However, whether the minimal differences indeed mean nothing to investors remains to be seen. The iShares active ETF is only seven months old.
An Investment Officer comparison between the second largest passive and active ETFs in Europe shows that the cost difference is smaller than the performance difference.
The iShares Core MSCI World UCITS ETF, a passive fund with $76.9 billion under management, has an expense ratio of 0.20 per cent. That is just 3 basis points less than the 0.23 per cent charged by the active JPMorgan Global Research Enhanced Index Equity UCITS ETF.
Over the past five years, the active JPMorgan fund delivered an annualised return of 13.69 per cent. The passive variant of iShares remained stuck at 12.84 per cent. This is according to data from Morningstar.
Emerging markets
Incidentally, active ETFs with a focus on emerging markets did not show a convincing picture.
The JPMorgan ETFs (Ireland) ICAV - Global Emerging Markets Research Enhanced Index Equity (ESG) UCITS ETF charges an annual fee of 42 basis points and achieved an average return of 2.41 per cent over the past few years.
The largest passive alternative, the iShares MSCI EM UCITS ETF, charges just 18 basis points and achieved a better return of 2.93 per cent. The passive ETF has larger weightings in almost all top investments with the exception of the largest investment: Taiwan Semiconductor Manufacturing Company (TSMC).
Europe’s largest active emerging markets ETF, the Fidelity Sustainable Research Enhanced Emerging Markets Equity UCITS ETF (cost: 30 basis points) has also lagged sharply behind the index since its launch in 2020. The ETF is Europe’s fourth-largest active ETF.
Globally, active ETFs attracted around $290 billion in assets in 2024. The most money went to the iShares U.S. Equity Factor Rotation Act ETF, with a whopping $11.7 billion. Passive ETFs, by the way, remain as popular as ever. In 2024, a record $1410 billion flowed into passive funds globally, according to Morningstar data. In 2023, it was 834 billion.