Active ETFs are still in their infancy in Europe but the product class is already at risk of being taken advantage of by new and existing issuers.
Firmly on the rise in Europe, gathering $6.8bn inflows in the first half of 2024, new entrants are lining up to enter the market – particularly in the US – where active ETFs have firmly established themselves.
The firms at the forefront of these new entrants have said the conversation around performance fees is a hot topic.
Steve Sachs, global chief operating officer of Goldman Sachs ETF Accelerator told ETF Stream: “Performance fees have been very topical in the conversations we are having with clients and is one that will continue to persist."
Meanwhile, Ossiam – which manages a range of passive and active ETFs – said it was monitoring the potential use of performance fees. White-labeler HANetf said it is also something clients are interested in.
Performance fees, generally charged as a percentage of profits over and above a benchmark or absolute level, could be seen to have some benefits.
Some issuers might argue performance fees align investors' incentives with the manager, but an investor committing a significant chunk of assets to a fund already has all the incentive they need.
If anything, the introduction of performance fees encourages more risk-taking by asset managers, who are set to profit from gains on the upside with little negative on the downside.
Regulation in Europe currently allows for performance fees, but they must comply with applicable European Securities and Markets Authority (ESMA) guidelines.
That means they must be aligned with investor interests and based on a clear and appropriate benchmark which is calculated consistently and adequately disclosed to investors.
Adding another layer of fees on an ETF wrapper risks damaging the reputation of the product class which has built its reputation on transparency.
Discussions around this are clearly in early stages but any further development must not tarnish its reputation.
