Analyzing Investment Trends: Active ETFs vs Smart Beta in Europe

The investing landscape is constantly evolving, and one of the latest trends to take the European ETF market by storm is the rise of active ETFs. With investors flocking to quantitative-driven ETFs from top asset managers, questions have arisen about the role of smart beta within multi-asset portfolios.

Smart beta ETFs have struggled to gain traction over the past decade, with last quarter seeing €1.5 billion in outflows as investors turned away from value and risk-orientated products. Despite their potential benefits, smart beta ETFs have often left investors disappointed due to high correlations with parent benchmarks and higher fees.

In contrast, active ETFs have gained popularity with investors seeking incremental outperformance through a quantitative-driven approach to stock selection. The success of ETFs like the JPM US Research Enhanced Index Equity (ESG) UCITS ETF (JREU), which has ballooned to $7.1 billion AUM since launching in 2018, highlights the appeal of these strategies.

According to Monika Calay, director of manager research at Morningstar, active ETFs in Europe are biased toward lower-alpha, lower-active share products, as well as quantitative and sustainability-tilted products. By switching from a smart beta to an active approach, investors gain flexibility to navigate changing market environments and can potentially exploit pockets of value that rules-based approaches may overlook.

The shift towards active ETFs is also evident in the fixed income space, with JPMAM converting its multi-factor high yield bond ETF into an actively managed strategy in 2023 to better respond to market events and liquidity challenges.

While the difference between rules-based smart beta and quantitative-driven active ETFs may seem subtle, investors are increasingly drawn to the promise of outperformance and flexibility that active strategies offer. As the ETF landscape continues to evolve, the competition between active and smart beta strategies is likely to drive further innovation and new opportunities for investors.

In conclusion, while the debate between active and smart beta ETFs continues, it is clear that active ETFs are currently in the spotlight for their potential to deliver incremental outperformance and navigate changing market conditions. As the ETF market evolves, investors will have a range of options to choose from, each offering unique benefits and opportunities for portfolio growth.