As exchange-traded funds continue to move beyond their roots of being just plain-vanilla passive investment vehicles for US institutional investors, the need for efficiency in creation, sales and trading becomes more challenging.
While active ETFs comprise less than 10% of ETF assets globally, active ETF assets have been growing faster than passive, packaged with more variety of underlying assets and a wide range of strategies, and increasingly bought and sold by retail and European market participants.
“Every new product type to a degree has had a pivot of ETFs in it – passive, active, crypto, tokenization, what have you,” said Ciaran Fitzpatrick, Global Head of ETF Product at JP Morgan. “Every single day there’s something new going on.”
New ETF product and strategy announcements can grab attention, but asset building and staying power will come down to how seamlessly and cost-effectively an ETF can be issued and traded.
“The difference in ETFs – the way that they function and the spreads at which investors can access them – become a really key part of the success of that ETF,” said Matthew Legg, Global Head of Delta One and ETF Sales at JP Morgan. “People will anticipate that they can have the same experience, the same positive experience, they had in passive in active.”
Fitzpatrick and Legg spoke about trends in the global ETF market and JP Morgan’s capabilities in the space. A transcript of the conversation was provided to Markets Media.
Sustained strength
ETFs were introduced in the US in 1993, but they were mostly a curiosity and didn’t really catch on for about a decade. Distinguished by their intraday liquidity, ETFs caught traction starting in the 2000s and supplanted mutual funds in the portfolios of many investors, who saw the benefits of ETFs’ trading flexibility as well as their lower cost and tax advantages.
Recent industry research underscores the uptrend. U.S. ETFs assets have more than doubled since 2020, rising to more than $12 trillion this year, according to BlackRock. And ETF buyers are skewing younger: recent Cerulli data shows that ETFs have become the fastest-growing investment product on self-directed digital platforms, outpacing stocks and mutual funds.
“This momentum underscores the need to accelerate innovation, broaden access, and scale education to pursue better outcomes for all investors,” Elise Terry, Head of U.S. iShares at BlackRock, said in People & Money: The Next Wave of U.S. ETF Investors.
That’s what securities services professionals are working on. JP Morgan’s Legg said ETFs that track indexes such as the S&P 500 have become “super-efficient” in providing low-cost access to passive returns for a broad range of investors, but ”where things have really taken off recently is in the expansion into active,” led in the US and tracked in Europe.
Legg sees the retail trends cited in the report on the front lines at JPM. “One of the most common discussions we have with issuers is about their desire to market or be able to market to that whole new generation of wealth coming through,” he said. “Technology is making it really simple for retail to access these funds.”
Fitzpatrick noted that ETF issuers across the spectrum, established and startup, need a “platform strategy” to meet this emerging investor class where they are.
One moving piece in active ETFs has been in Europe, where recent regulatory changes have opened the door for the investment vehicles to downshift from full transparency, which entails daily reporting of positions, to a semi-transparent model, which allows reporting monthly or quarterly. The rationale is that ETF issuers will be more willing to include investment strategies that could be undermined by public daily position updates; Legg said an advantage of this is that while external reporting would be on a delayed basis, Authorized Participants (APs) could still access daily holdings, which would keep transaction costs and market risk spreads tight.
Private Asset ETFs?
Another active current discussion pertaining to ETF market evolution is the suitability of the underlying assets. “What’s the right asset to have in an ETF now? Is it just equities? Is it bonds? Is it a combination, like a multi-asset strategy?” Fitzpatrick said. “And now we’re seeing at a very initial phase of managers looking to put private assets into ETFs. Is that a stretch too far?”
Buyers and sellers of ETFs see easy access, low cost and wide choice, but they don’t typically see behind the curtain, where market participants drive that efficiency. “One thing that’s been interesting to observe is the electronification of these markets,” Legg said. “All of the operational processes need to be scaled and they need to be systematized. The ETF fits really well into that more technology-dependent execution structure.”
JP Morgan is “all in” on ETFs, Fitzpatrick said, with a strong focus from the top of the firm to ensure the right partnerships are in place and world-class client service is a given. “We’re seeing more and more in the industry that asset managers and issuers are looking for a strategic partnership,” he said. “It’s not just custody administration anymore, it’s also about access to capital to get a product off the line, and then expertise across the globe at servicing the products.”
Legg closed by noting issuer client discussions have changed from starting with why an investment vehicle should be an ETF, to starting with why it shouldn’t be an ETF. “The burden of proof has crossed, which I think is an interesting change in perspective,” Legg said.
