Ever since the launch of the first exchange-traded fund in 1993, ETFs have evolved. From an initial focus on equities they now include bonds, and have moved from a passive to an active management style. Alongside the evolution, they have preserved two key features: comparatively low costs and transparency. This has earned ETFs the “You know what you have and what you’re going to get” moniker.
The resilience of ETFs across cycles has been key to the development of new products. One of the more recent developments, active ETFS, have seen seen their share of total ETF net flows increase fourfold over the past five years. While the segment accounted for only about 5% of the ETF industry in the US in 2022, it captured about 15% of net flows. In Europe growth has been slower, but can be expected to pick up as investors add ETFs to their portfolios.
Sustainable active ETFs
Another source of growth will be sustainable active ETFs. Ensuring that sustainability criteria are met involves more than just replicating an index. Assessing which companies can be included and where there might be potential controversies requires an active rather than a passive management style.
The lines between active and passive ETFs can anyway be blurry. This is the case when a strategy applies an optimisation approach for replication, where one buys a large proportion, but not all, of the components of an index to ensure diversification. Such a selection process is effectively a form of active management.
ETF assets under management (AUM) have risen by 16% annually over the last decade. Further investment in active ETFs is expected to contributed to a threefold rise in AUM from current levels, reaching USD 30 trillion by 2030.
The November 2022 BNP Paribas Asset Management European ESG ETF Barometer found that most investors questioned expected the European sustainable ETF market to continue to expand in 2023, with particular interest in low-carbon strategies and those aligned with the Paris Agreement.
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