Active ETFs have been a major story over the past 18 months. What’s driving this trend?
Active ETFs are among the hottest trends globally. This momentum is particularly strong in the US, where regulatory changes – specifically the SEC’s approval of the 6c-11 rule – removed the need for individual exemptive relief, opening the door for many non-passive issuers.
Traditional active mutual fund managers are responding to a clear demand shift. Investors are moving away from mutual funds, and while some are going into passive ETFs, a growing portion are also flowing into active ETFs.
Active ETFs are among the hottest trends globally. This momentum is particularly strong in the US, where regulatory changes – specifically the SEC’s approval of the 6c-11 rule – removed the need for individual exemptive relief, opening the door for many non-passive issuers. Traditional active mutual fund managers are responding to a clear demand shift. Investors are moving away from mutual funds, and while some are going into passive ETFs, a growing portion are also flowing into active ETFs.
For new managers, launching active ETFs is a logical move. The alternative might be to lose assets altogether. We’re not seeing concerns around cannibalising existing assets; rather, the thinking is “if I don’t offer ETFs, I’ll lose clients”.
What makes active ETFs an appealing entry point for managers?
What makes active ETFs an appealing entry point for managers?
For one, they aren’t jumping into a saturated passive market like the S&P 500 or FTSE 100. Many are launching ETF versions of existing mutual fund strategies, giving them the ability to offer unique value or generate alpha based on proprietary research and methods.
But it’s not a cure-all.
A poorly performing mutual fund won’t suddenly improve just because it’s now in an ETF wrapper. The core strategy still needs to be solid, and firms must be able to distribute and market the product effectively.
How does JP Morgan position itself as a service provider to ETF issuers, particularly new entrants?
How does JP Morgan position itself as a service provider to ETF issuers, particularly new entrants?
Many of the new ETF entrants are coming from a mutual fund background and may never have issued an ETF before. So, we play an advisory and educational role, helping them understand what’s needed structurally and operationally to launch an ETF.
At JP Morgan, we leverage our full suite of services – custody, fund accounting, delta one trading, AP services, and ETF servicing – to deliver a comprehensive solution. We’re not offering a white-label solution, but rather aiming to integrate ETF support seamlessly for both existing clients and new entrants utilising the breadth of JP Morgan globally.
Our global markets business plays a big role – we’re an authorised participant, provide seed capital, offer dedicated FX and programme trading services desk, and have built an ETF-specific FX solution across freely traded and restricted markets to ensure certainty of executions for issuers and APs.
There’s growing interest in ETF share classes of mutual funds. What’s driving this?
There’s growing interest in ETF share classes of mutual funds. What’s driving this?
The catalyst was the expiration of Vanguard’s US patent on ETF share classes in 2023. That’s sparked interest among managers in launching ETF share classes of existing mutual funds, especially as a quicker, more cost-effective route to market.
There are around 60 active submissions to the SEC requesting approval for a share class structure in the US, with it looking like the SEC is favouring a refiling by Dimensional as the path forward for the share class solution in the US market.
In Europe, where mutual fund share classes are already standard, some firms are exploring the same structure. However, the lack of capital gains tax benefits, unlike in the US, means the value proposition differs. It’s feasible, but only if the structure is designed correctly to ensure fairness and minimise risks between share classes.
How is retail investor participation shaping the ETF landscape in Europe?
How is retail investor participation shaping the ETF landscape in Europe?
The ETF market in the US is majority retail – about a 60/40 retail to institutional split – whereas Europe has traditionally been heavily institutional, closer to 80/20. That’s changing.
We’ve seen increased retail uptake during the Covid period, helped by ETFs being included in savings plans and model portfolios and offered on online platforms. European regulators are also playing a role – Mifid II has focused on ensuring that retail investors are sold the most suitable products, rather than the ones with the highest commissions. A full removal of retrocessions by the European Commission for investment products in Europe would be a move that would further increase the participation of retail investors in ETFs.
Platforms are now working around the challenge of fractional shares, making ETFs more accessible. There’s also a significant opportunity: over ¤11 trillion is reportedly sitting idle in low- or no-yield accounts across Europe. Even capturing a small share of that would be transformative for ETFs.
What are your views on the recent launch of crypto and digital asset ETFs?
What are your views on the recent launch of crypto and digital asset ETFs?
It’s important to distinguish between two trends: ETFs that hold digital assets (like Bitcoin or Ethereum), and tokenised ETFs.
In the US, we saw significant flows into spot Bitcoin ETFs following SEC approval – mainly concentrated among a few players like iShares and Fidelity. Ethereum has followed suit. In Europe, the crypto exposure comes via ETPs rather than fund structures, due to regulatory constraints that prevent funds from holding crypto directly.
Crypto ETF growth in Europe is more modest, partly because mutual funds can’t invest in them yet. That could change if regulation evolves. We’ve seen big names like BlackRock and DWS launch crypto products, so interest from institutional brands is growing.
How about tokenisation then – how is that trend developing in ETFs?
How about tokenisation then – how is that trend developing in ETFs?
Tokenisation is still in its early stages but holds great promise. It refers to creating a blockchain-based version of a traditional ETF. We’re currently seeing tokenised money market funds and bonds being developed more actively.
The ETF model fits well with blockchain given the double sided transactional nature of trading and settling ETF shares. Some firms are testing models where a traditional ETF share is created and then cloned as a tokenised share on a blockchain. This is proving the concept works utilising a digital TA structure, but in this POC model it is adding additional cost as all the traditional players are still in place in the ecosystem.
At JP Morgan, we’re exploring tokenisation solutions through our internal tokenisation platform, Kinexys. But for tokenisation to really take off, we need to streamline processes – removing rather than adding intermediaries – to reduce costs and increase efficiency.
Will tokenisation become mainstream for ETFs?
Will tokenisation become mainstream for ETFs?
In three to five years, yes, I believe tokenised ETFs will be more widely adopted. For it to succeed, though, investors, regulators, and service providers all need to get comfortable with the technology and operational models.
Ultimately, tokenisation could allow ETFs to be traded and held in digital wallets alongside crypto and other assets, which would align with generational shifts in investment preferences.
Final thoughts – what’s JP Morgan’s core differentiator as an ETF servicer?
It’s our ability to offer a truly integrated solution. We bring together the strengths of our securities services, markets, and trading business and ETF solutions under one roof. Whether it’s helping clients launch their first ETF or integrating complex strategies, we’re able to deliver nearly end-to-end support.
Final thoughts – what’s JP Morgan’s core differentiator as an ETF servicer?
It’s our ability to offer a truly integrated solution. We bring together the strengths of our securities services, markets, and trading business and ETF solutions under one roof. Whether it’s helping clients launch their first ETF or integrating complex strategies, we’re able to deliver nearly end-to-end support.
That soup-to-nuts scalable solution set allows clients to avoid the fragmented, multi-service provider model that may impact growth, competitiveness and scalablity . That’s where we see our most strategic value.