Over the past year, active ETFs have gained considerable media attention as potential disruptors. While some view them as the inevitable successors to mutual funds, questions remain as to how central they will be within the broader investment and wealth management landscape and whether it is too late for fund managers to engage. As expected, there is no simple answer – but one thing is clear: success in the active ETF market is not a surefire guarantee. Managers evaluating their prospects across the U.S. and European active ETF landscapes must account for regional dynamics within their target markets.
Current Dynamics: Active ETFs in the U.S. vs. Europe
Market Size
The U.S. is the undisputed leader of the global active ETF market, with BlackRock estimating assets under management across U.S. actively managed ETFs to be almost $700 billion as of June 2024.1 The growth outlook for active ETFs in the U.S. is overwhelmingly positive, as retail investors and intermediaries continue to seek low-cost investment products that meet their liquidity and allocation needs.
In contrast, the European Active ETF market is still relatively embryonic. This is unsurprising, given the more scattered adoption rate of ETFs among European investors overall – the $2 trillion European ETF market2 is nearly four times smaller than that of the U.S. While some European markets have seen significant growth in demand for ETFs (e.g. DACH), others, such as Southern Europe, have been slower to adapt.
Competitor Landscape
The U.S. active ETF market is shifting towards greater concentration, with the 10 largest managers capturing 74% of AUM.3 Market leaders include firms such as J.P. Morgan, Dimensional Fund Advisors, and Capital Group — all firms with strong active management track records. Managers looking to launch new active ETF products in the U.S. must therefore be strategic regarding their product development, growth objectives, and distribution strategy, as we anticipate this select group will continue to dominate market share within the U.S. going forward. The active ETF market in Europe is similarly concentrated, with JP Morgan capturing circa 43% market share.4 However, the relative nascency of the active ETF market in Europe, compared to that of the U.S., presents greater opportunities for new entrants to influence and shape the market. Currently, several large European and U.S. active managers are looking to penetrate the European market, either organically or through M&A.
Regulatory Landscape
Within the U.S., regulatory complexity regarding ETFs has been significantly alleviated. New pro-ETF legislation continues to be introduced, with the latest development being the SEC’s transition from a T+2 to a T+1 settlement cycle in an effort to reduce settlement risk and increase market efficiency.5 Previously, the ‘ETF Rule’ passed in 2019 laid the foundation for growth by enabling asset managers to launch ETFs without the cost and delay of obtaining an exemptive relief 6, as evidenced by the increase in subsequent ETF launches.
While local regulators across Europe are increasingly signaling a willingness to adapt regulations, the continent’s fragmented regulatory landscape remains a key consideration for ETF managers. The UCITS framework allows for cross-border distribution within the EU, but each country’s financial regulator may impose specific requirements for issuing and marketing ETFs. Larger managers with established, multi-jurisdictional distribution networks will therefore have a competitive advantage over their peers.
Tax Considerations
Beyond a favorable regulatory environment, a core driver of active ETF adoption in the U.S. has been the tax advantages for retail investors as a result of the unique “in-kind” redemption process. In contrast, European investors do not consistently observe the same advantages due to varying local tax legislation, which impacts the benefits of the ETF structure. In the absence of a consistent and unified European tax framework, the influence of tax regimes as a key propeller of ETF adoption will continue to vary by country.
Implications for Fund Managers
Within the U.S., managers must be strategic about launching their active ETF capability, particularly as the first-mover advantage continues to diminish. Managers must have a clear perspective of the value proposition that their active ETF products can offer potential investors and be prepared to compete with large brand name managers boasting significant scale and experience.
In Europe, a first-mover advantage remains for those who act quickly. Given the market’s fragmentation, fund managers can enhance their success by focusing on European regions with high ETF demand and strong existing distribution networks, rather than applying a ‘one size fits all’ approach. Firms with pre-established investor bases and captive intermediary channels have a distinct competitive edge. Additionally, emerging distribution opportunities, such as model portfolios, will further accelerate market growth.
Finally, M&A remains a crucial lever for managers looking to quickly scale their active ETF offerings. By acquiring complementary firms or technologies, managers can enhance their capabilities and broaden their product range, keeping pace with rapid innovation in the active ETF space.
Conclusion
Accounting for key regional nuances is a critical component of success for managers looking to launch an active ETF offering. The U.S. active ETF market is poised for sustained growth, supported by favorable regulatory dynamics and increasingly mature adoption. As the first-mover advantage continues to diminish, success will likely favor firms with strong, captive distribution networks. In Europe, market fragmentation presents unique challenges, but managers with scale and cross-border capabilities will have a natural edge. For those aiming to gain market share in Europe, focusing on a tailored, local strategy may offer a more effective path to success than attempting to tackle the entire EU market at once. Whether Active ETFs will truly replace mutual funds remains to be seen. Nothing is a given, but their future looks promising, offering ample opportunity for those ready to navigate these nuanced landscapes.
Alpha FMC is the leading global wealth and asset management consultancy with extensive experience helping clients develop and enhance their capabilities. If you have any questions or would like to find out more, please contact us.
References:
1BlackRock (July 2024). Decoding active ETFs: How the growth of active ETFs is unlocking innovation and opportunity for investors. Retrieved from https://www.ishares.com/us/insights/active-etf-investors.
2Lee, J (March 26, 2024). BlackRock Dominance Means Fight for Second in Europe’s $2 Trillion ETF Market. Bloomberg. Retrieved from https://www.bloomberg.com/news/articles/2024-03-26/blackrock-dominance-means-fight-for-second-in-2-trillion-market.
3 Morningstar (April 2024). Morningstar’s Guide to US Active ETF. Morningstar. Retrieved from https://www.morningstar.com/business/insights/research/guide-to-us-active-etfs.
4 Gibbons, L (September 18, 2024). J.P. Morgan Active ETF Hits $10B European Landmark. ETF.com. Retrieved from https://www.etf.com/sections/news/jpmorgan-active-etf-hits-10b-european-landmark?utm_source=yahoo-finance&utm_medium=rss&utm_campaign=yahoo-finance-rss.
5SEC (February 15, 2023). SEC Finalizes Rules to Reduce Risks in Clearance and Settlement. SEC.gov. Retrieved from https://www.sec.gov/newsroom/press-releases/2023-29.
6SEC (September 26, 2019). SEC Adopts New Rule to Modernize Regulation of Exchange-Traded Funds. SEC.gov. Retrieved from https://www.sec.gov/newsroom/press-releases/2019-190.
About the Authors
Max van Baasbank
Engagement Director
Max is an Engagement Director within Alpha’s Strategy & Deals team based in New York. Max has delivered a wide range of strategy engagements, exclusively within the investment management
sector. He has extensive experience in all areas of strategy advisory, M&A advisory, market opportunity assessments as well as profitability modelling. Prior to joining Alpha, Max was an Analyst at Deloitte in London, working within the Capital Markets Consulting practice. He holds a Bachelor’s degree in International Business Administration and a Master’s degree in Finance & Investments, both from Rotterdam School of Management.
Diane Yoon
Associate
Diane is an Associate within Alpha’s Strategy & Deals team based in New York. She brings extensive experience across asset and wealth management, legal and compliance, and consulting. Diane has supported clients through pivotal phases, including pre-deal due diligence, and has helped them identify and define strategic initiatives by providing a thorough understanding of industry challenges and opportunities. Prior to joining Alpha, Diane completed internships at Morgan Stanley and BMT, gaining broad exposure to the financial services industry. She graduated Magna Cum Laude from Boston College with a Bachelor of Arts in Economics and a minor in Philosophy.