ETF service providers have experienced a “spike” in interest from active mutual fund managers looking at entering the ETF market.
This follows a recent change in stance from the Central Bank of Ireland (CBI) making it “more realistic” for mutual fund managers to launch listed share classes of existing products.
Andrea Murray, vice president of investor services at Brown Brother Harriman (BBH), said there had been a “spike” in the number of active managers looking to enter the European ETF market via listed share classes.
Conversations around this channel have “skyrocketed”, she added.
BBH are speaking with potential new ETF entrants on a “weekly basis” and “over 95% of the conversations are focused on growth opportunities within the active ETF space.”
Hazel Doyle, partner at K&L Gates, said the law firm has “a number” of clients considering launching ETF share classes of active mutual funds.
“In our experience so far, this has predominantly been in the fixed income space where the fund is not seeking to benefit from the double taxation treaty between Ireland and the US…we have however seen some interest from equity funds without exposure to US equities.”
While active ETFs have enjoyed strong growth, as the below chart illustrates, they remain a small part of the overall industry – just 2.2% of ETF assets as of 30 September, according to Morningstar data.
Chart 1: European active ETF flows by asset class, 2020-present
Source: Morningstar Direct
However, the CBI’s U-turn could accelerate the growth of active ETFs in Europe.
Ken Shaw, head of ETF solutions for EMEA at State Street, described the move as a “positive development for the industry, and active managers in particular.”
While it may not trigger a wave of mutual fund managers launching ETF share classes “in isolation…it removes a supposed barrier to entry that was deemed divergent to other jurisdictions and should be warmly welcomed by the industry,” he added.
According to Doyle, larger active managers with a strong distribution model in place are “at the very least considering” entering the ETF market.
For Murray, “the distribution opportunities are just too big to ignore at this stage.”
