Mutual fund directors and investment advisers digest

Actively managed ETFs: Three potential paths to a success strategy

The ETF market has seen significant growth over the past few years, fueled by the passing of rule 6c-11 by the SEC in 2019, which reduced the barriers to entry into the ETF market. ETFs have grown about 15% annually over the past 13 years, almost three times faster than traditional mutual funds. Given this history of growth and no signs of slowing down, an ETF strategy may be necessary for investment managers to continue to compete. And while there are several product development trends underway for 2024, ETFs remain at the forefront of the conversation. 

ETFs were first launched in 1990 but have heated up in recent years and now ETFs are one of the main drivers of innovation in the investment management industry. The pricing and liquidity characteristics of ETFs have led to an expansion of their use while placing competitive pressure across the industry. 

Actively managed ETFs (non-transparent and transparent) are the latest development, and while the concept of active management in an ETF is not new, 2023 saw rapid growth in the use of actively managed ETFs. The assets under management (AUM) for actively managed ETFs rose 40% year over year in 2023. Increased tax efficiency and enhanced transparency are likely driving this trend.

Today, we explore three ways to make a strategic play in the ETF market. Each has regulatory, accounting, reporting, tax, and operational considerations that are unique to the path chosen.

Is choosing a path a must?

We have covered three paths that investment managers can use to enter the ETF market. There are similarities and differences between all three methods, and the key to success will be executing on the strategy and meeting the investor demand. 

To achieve success on any path, an investment manager should start with a seasoned ETF leader. It’s imperative to work with one that has experience and relationships with the market and key shareholders. The asset manager also needs to be committed to a well thought out marketing and distribution plan, given this will essentially be an extension of their existing business and product line; only bolting it on as additive to the existing operating model is not a recipe for long term success. Thus, focused ETF investments of dollars, resources, education, digital tools, and capabilities can help increase the likelihood of success and enhance your operating model and talent accordingly. 

Lastly, an efficient and effective operating model with digital capabilities and enhanced client experience capabilities will help widen the path to success. The bottom line is it will be hard to travel too far down any of the paths unless the investment manager is fully committed to the journey. Those who stay the course and provide investors with viable ETF investment options and education will be rewarded.