2025: Year of the active ETF

The active exchange-traded fund (ETF) market has continued its impressive growth in 2024, and is likely to continue to grow rapidly over the coming year.

– The ETF market continues its meteoric growth, with active ETFs’ market share rising as asset allocators look beyond passive funds towards research-led solutions that can supplement returns and help manage idiosyncratic investment risks.

– Our active ETFs represent the next generation of portfolio building blocks for asset allocators to use to implement their strategies.

The ETF market in the US, Canada, Europe and APAC continued its impressive growth in 2024, with US$13.9 trillion in asset under management. In Asia Pacific, ETFs comprise 24 per cent of the total fund market, having grown significantly in the past five years, with active ETFs skyrocketing at a cumulative annual growth rate of 57 per cent1. Their popularity with investors is a function of several factors, including the low cost, ease of use, liquidity, diversification potential and transparency of ETF solutions. However, it is perhaps the huge breadth of choice of ETFs across the market that make them indispensable for asset allocators; almost every liquid asset class and geography is accessible in some way via solutions from several ETF providers.

Despite this, one area of the marketplace remains relatively under-represented: active management. Fortunately, this is now changing as technological innovations are enabling the most advanced and resourceful managers to provide active strategies in ETFs alongside the typical advantages of their passive counterparts. PricewaterhouseCoopers (PWC) expects the global ETF market to grow to $20 trillion in assets under management by 2030, a 17% compound average growth rate2, and we anticipate that active ETFs’ will grow even faster, increasing their share as more investors discover their benefits.

Our current range of active ETFs incorporates research insights to deliver alpha, as an active mutual fund might. However, they also deliver other attractive characteristics typical of passive ETFs (which mutual funds might not). These include a high level of liquidity and transparency, so that investors understand the exact exposures they are getting and can trade in and out at short notice. They also include a high level of diversification and low tracking error, as we believe asset allocators do not want their ETF exposures to deviate significantly from those of their underlying market. Finally, and perhaps most importantly for some investors, all these characteristics are delivered to the end investor in a cost-effective manner, which has only been made possible through our significant investments in people and technology over many years.

The foundation of our ETFs is their ability to leverage investment insights from within Fidelity’s extensive global investment platform. This source of alpha has been proven to deliver value over extended timeframes and is differentiated from anything else in the market. It cannot easily be reproduced, but as it already exists within our business, our ETFs can deliver it in a cost-effective manner.

A key feature of our active ETFs is that their portfolios tilt towards securities viewed positively by our investment team. However, unlike mutual funds, which trade continually, our ETFs rebalance periodically at times when the value of portfolio adjustments is the greatest (e.g., following a market-moving event). This helps to ensure cost-efficiency, while still ensuring that portfolio exposures are dominated by securities that our investment team views favourably on an ongoing basis.

We recognise that when asset allocators seek to invest in a specific asset class or market, they generally want broad macro-factor exposures similar to that market (e.g., sector exposures). We have therefore developed sophisticated technology to deliver a second key characteristic of our ETFs – that their macro-factor exposures are closely aligned with those of their respective benchmarks (without compromising their ability to tilt towards securities we view favourably).

To achieve this, our portfolio managers harness the wealth of proprietary data within our global research platform to optimise portfolios’ aggregated factor exposures by manipulating the weightings of their individual underlying investments. While past performance is not an indicator of future returns, this has historically allowed our ETFs to deliver low tracking error alongside asymmetrically positive upside/downside capture.

In terms of market access, liquidity management poses potential logistical difficulties for active strategies. We deal with this partly via advanced portfolio optimisation processes, which maintain appropriate portfolio concentration levels for individual investments. However, we also work with authorised participants to ensure cost-effective trading (whether for rebalancing or flow management).

The authorised participants with whom we deal are aware of the securities present in each ETF at the start of the day and their concentrations, and these are published publicly to ensure transparency. This allows them to offer quasi-matching inventories of securities from their own books to boost liquidity and reduce costs, particularly in less liquid markets like high yield fixed income. It is the sum-total of these nuanced processes that facilitates the efficient implementation of our dynamic ETF strategies.

1 Broadridge data as at 31/08/2024. AUM total is US$13.9trn with 26.91% from totalling ETFs sold cross-border and domestically in Europe and Asia.

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CMO-2024-2181728-(SG)