Distributors globally are choosing ETFs over active funds to generate alpha

Passives constitute a major portion of the global mutual fund market. In fact, ETFs due to their low cost have emerged as a popular investment option among passives.

Deborah Fuhr, Managing Partner and Co-founder at ETFGI, a London-based independent research and consultation firm shared insights into the global ETF market and why ETFs are increasingly seen as a better investment option than actives. The virtual session was one of the key highlights of the Cafemutual Passives Conference (CPC) 2024. Here are key highlights of the session:

Increasing popularity of ETFs

The global financial crisis of 2008 made ETFs popular as a simple, cost-efficient, liquid investment option in the US and Europe. COVID-19 also accelerated the growth of ETFs in the financial markets. They give variety of options to investors including equity and fixed income.

Global data shows that ETFs have now recorded 58 months of positive net inflows regardless of market cycles during the period.

Who is investing in ETFs and why?

Research has shown that a large majority of active funds are failing to outperform their benchmarks on a 1-year, 3-year and 5-year basis.

Increasingly, investors looking to find active funds that generate alpha are moving towards ETFs. A lower cost product like ETF helps in asset allocation that generates alpha. This is why institutional investors, financial advisors, retail, portfolio managers and fund selectors are choosing ETFs as part of core or satellite portfolio and a useful option for hedging, accessing emerging markets and sector rotation.

Distributors and financial advisors globally are using ETFs to build model portfolios to get more time with their clients and serve their valuable needs like taxation.

Current global trends in ETFs

Globally, there are about 2500 actively managed ETFs. Equity ETFs, smart beta ETFs, thematic ETFs have seen good inflows in recent times. ESG (Environmental, Society and Governance) ETFs have also seen good inflows in Europe. There are also ETFs giving exposure in cryptocurrency and emerging markets, which have seen promising positive net inflows.

Up till 2022, majority of ETF AUM was in actively managed fixed income ETFs. Since then, the popularity of actively managed ETFs in equity has increased and has surpassed the fixed income ETF category.

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