Almost everyone who has looked into investing in recent years has heard of ETFs. They experienced a massive surge in popularity in the 2000s, alongside the rise of passive investing. Because of this, many investors still see ETFs as synonymous with passive investing. However, there are also active ETFs, and they are now making their case for the spotlight.
What are ETFs exactly?
ETFs are investment funds that trade on stock exchanges, much like individual stocks, with prices fluctuating throughout the trading day based on supply and demand. They hold a collection of assets such as stocks, bonds, commodities or even derivatives, similar to their non-exchange traded counterparts, mutual funds.
Being exchange-traded brings many benefits as ETFs can be traded throughout the day, allowing investors to trade intra-day events, and they can be purchased in small quantities. Mutual funds, on the other hand, can be traded only once a day and tend to have high minimum investment sizes. Perhaps the biggest advantage of ETFs is that, all else equal, ETFs tend to have lower fees than mutual funds as among other things, they have lower distribution fees and are not required to keep records of their shareholders, reducing administrative costs. These features have made ETFs popular with both individual and institutional investors.
ETFs have seen significant inflows over the last decade. In 2024 alone, overall assets invested in ETFs increased by 28%, from $11.5 trillion to $14.7 trillion by year-end, driven by strong market performance and continued inflows.[1]
This marks a stark rise from the $2.7 trillion in 2014, just 10 years ago. Not only have their total assets grown drastically, but also the number of ETFs has nearly tripled during the same period, from roughly 4’000 to about 11’600.[2]
From Passive to Active
ETFs were originally designed to track and replicate the performance of a specific index or sector. Once the ETF structure proved successful, asset managers started to introduce active products using the ETF structure.
Active ETFs are managed by professional portfolio managers, who make investment decisions with the goal to outperform an index. They are primarily aimed at investors seeking the potential for outperformance, whilst still enjoying the benefits of the ETF structure.
And so far, the effort has been successful. The global active ETF market reached $923 Billion in June 2024, with the US accounting for about 75% of the total.[3] While passive ETFs still make up the larger share of the market, actively managed ETFs have surged in recent years. In 2023, active ETFs captured roughly 20% of net inflows into ETFs and grew 37% globally, compared with just 8% growth for passive ETFs.[4]
Regional trends have varied. In the US, active ETFs captured 30% of total ETF inflows in 2024. Accounting for roughly 9% of the US ETF market by the end of the year.[5]
In Europe, by contrast, active ETFs attracted 8% of inflows during the same period[6], and represented roughly 3% of market share at the end of 2024.[7] Active ETFs have only begun to emerge in Europe in recent years. This is highlighted by the contrast in both growth and AuM between the US and Europe.
The divergence is largely structural. The US ETF market launched earlier than the European, benefits from strong tax advantages, and operates within a single, unified capital market. In contrast, Europe’s fragmented regulations, diverse tax regimes, and reliance on traditional fund distribution have slowed ETF adoption.
Bergos approach to active ETFs?
Bergos has integrated active ETFs into its investment universe and fund selection where appropriate. Despite the advantages of the ETF structure, the preferred vehicle always depends on the underlying assets and strategy. One of the key disadvantages of ETFs is that they cannot refuse new money. Some of the best active strategies deliberately limit the number of investors they accept, otherwise, managers would be forced to invest in second-best ideas. This typically restricts active ETFs, and ETFs in general, to the most liquid markets with sufficient capacity. Their opportunity set is further constrained by the fact that they cannot invest in private companies.
This leads to a second, and arguably more important, point, our primary focus is to select funds not only on structural characteristics but also for their underlying values. The Bergos approach remains to select funds on a best-in-class basis, with investment expertise and fund management quality at the core of our selection process. Ultimately, it is what lies inside the fund that matters most.
[1] ETFGI reports the global ETFs industry gathered a record 1.88 trillion US dollars during 2024 | ETFGI LLP
[2] ETFGI reports the global ETFs industry gathered a record 1.88 trillion US dollars during 2024 | ETFGI LLP
[3] The Active ETF State of Play: A Worldview of the Growing Trend | Irish Funds Industry Association | International Investments
[4] The Active ETF State of Play: A Worldview of the Growing Trend | Irish Funds Industry Association | International Investments
[5] Comparing ETF Asset Distribution – Active and Passive strategies | SG Markets Insight
[6] https://global.morningstar.com/en-gb/etfs/european-etfs-attract-record-inflows-2024-stock-markets-soar
[7] Comparing ETF Asset Distribution – Active and Passive strategies | SG Markets Insight