Rise of active ETFs highlights looming prospect of dwindling fees #NewsMarket

The growing number of asset managers entering the active exchange traded fund arena in Europe is opening a debate on the revenues managers can generate from these products.

Over 90 per cent of assets in European exchange traded funds are managed passively, with a large part of the products’ growth linked to the low fees they typically charge.

However, the chief executive officer of Janus Henderson said earlier this year that the fees on active ETFs were “very different” from more well known passive products.

Speaking in the wake of Janus’s acquisition of fixed income ETF provider Tabula, Ali Dibadj said: “We’re very, very mindful that we have an investment team that’s very, very strong across many, many [areas] . . . The fee rate for most of these [ETFs] is very, very attractive because of that investment.”

This article was previously published by Ignites Europe, a title owned by the FT Group.

Having grown its active ETFs in the US to more than $18bn (€16.5bn) in assets under management, Janus is planning to expand this business in Europe.

The manager joins a growing list of active managers with similar plans as traditional mutual funds battle stiff competition from the relentless rise of low-cost passive ETFs.

But so far active ETFs have been priced significantly lower than for active mutual funds, analysis undertaken by Morningstar for Ignites Europe shows.

In Europe, active equity ETFs have an average annual charge of 26 basis points, compared with the average for active mutual funds of 112bp.

For active fixed income, ETFs charge an average of 30bp, while mutual funds have annual costs of 64bp.

But in the US, where the market for active ETFs is more developed, the difference in average fees is narrower.

US-domiciled active equity ETFs charge 32bp on average, while mutual fund equivalents have annual fees of 62bp.

The difference in charges is even narrower for active bond products in the US, where ETFs charge 34bp compared with 43bp for mutual funds.

Morningstar compares charges based on the net expense ratio for the US market and ongoing charges for Europe. The averages are calculated on an asset-weighted basis to better reflect the cost of products where most client money is invested.

Kenneth Lamont, senior analyst at Morningstar, said active ETFs “tend to launch” with lower fees than traditional mutual funds in Europe.

One of the reasons for this is that active ETFs in the region tend to be “shy”, Lamont said, and the products are “often ‘index plus’, rather than high-conviction strategies”.

It is “harder to justify lofty fees” for these strategies, he added.

Other reasons for lower fees include the fact ETFs are priced to attract a broad range of investors.

However, Ignacio De La Maza, head of the Europe, Middle East, Africa and Latin America client group for Janus Henderson, said the manager had analysed the active ETF market and found that fees “are similar” to the fees charged by mutual funds.

He added that most of the success the firm had experienced with active ETFs so far had been with fixed income products in the US.

One of Janus Henderson’s highest-priced products in the US is the $305mn Securitised Income ETF, which has an expense ratio of 50bp. It delivered a total return of 4.97 per cent over the year to the end of June.

De La Maza said Janus Henderson wanted to give its clients in Europe access to active ETFs as it is a “wrapper of preference”.

The firm has plans to launch fixed income products in Europe before looking into equity strategies, he said.

Michael O’Riordan, founding partner of Blackwater, an ETF consultancy, said: “In theory there is nothing wrong with charging fees [for ETFs] in line with mutual funds.”

But ETFs have become “synonymous with low-cost products and there is an expectation from clients around this now”, he said.

Lamont added that the “relentless rise of ETFs globally has been fuelled by low fees, which have helped make core index strategies so difficult to beat over longer periods”.

“Other benefits such as intraday trading, transparency and simplicity make the ETF a superior fund structure,” he said.

But these benefits are “not compelling enough reasons to merit a mass migration on their own” to active ETFs, he added.

O’Riordan said the choice would come down to whether an active ETF was delivering alpha, because “it doesn’t really matter what the fees are” if they are not doing this.

*Ignites Europe is a news service published by FT Specialist for professionals working in the asset management industry. Trials and subscriptions are available at igniteseurope.com.