Actively Managed ETFs: Future Trends and Industry Insights

Current Market Trends in Actively Managed ETFs

The market for actively managed ETFs is experiencing significant growth, with major players like Invesco and BlackRock expanding their offerings and strategies. Invesco sees an inflection point for active ETFs, while BlackRock continues to innovate by integrating active management into their ETF technology. J.P. Morgan's launch of new actively managed ETFs further underscores this trend.

"It is our belief that we have just entered the investor inflection point for active ETFs, and this offers a renewed opportunity for growth of our $25 billion AUM actively managed ETFs and "actively powered" index-tracking strategies." --- (IVZ, press release, 2024/07/17)

"We always viewed ETF as a technology that facilitated investing. Since our acquisition of iShares, BlackRock has led in expanding the market of ETFs by making them more accessible by delivering new asset classes like bonds, investment strategies like actives." --- (BLK, earning call, 2024/Q1)

"Fund seeks to deliver JPM active management expertise and risk controls through ETF structure NEW YORK, May 17, 2024 /PRNewswire/ -- J.P. Morgan Asset Management today announced the launch of a new actively managed ETF, JPMorgan Active Developing Markets Equity ETF (JADE), on the NYSE Arca. The fund will invest in emerging markets equity securities." --- (JPM, press release, 2024/05/17)

"You probably have one of the best ETF franchises out there. So maybe again a bit more on the trends in that space and how Invesco can continue to compete and gain market share against the Behemoth?" --- (IVZ, conference, 2024/05/31)

"We're putting them into place with our planned acquisitions of Global Infrastructure Partners and Preqin. We're building our mix towards higher secular growth areas like private markets, technology, whole portfolio mandates, and model portfolios powered by both ETFs and active." --- (BLK, earning call, 2024/Q2)

Regulatory Environment and Its Impact

The regulatory environment is increasingly challenging, with significant legislative changes and uncertainties impacting the industry. Major players like JPMorgan Chase and BlackRock highlight the operational, technological, and regulatory risks, emphasizing the need for strategic adjustments and risk management to navigate these evolving challenges effectively.

"And looking forward, we expect loss rates to be relatively stable. Lastly, let's look at the changing regulatory environment. As you can see from the page, the industry is facing an onslaught of regulatory and potential legislative change." --- (JPM, event transcript, 2024/05/20)

"operational, technological and regulatory risks associated with BlackRock’s major technology partnerships; (27) any disruption to the operations of third parties whose functions are integral to BlackRock’s exchange-traded fund (“ETF”) platform; (28) the impact of BlackRock electing to provide support to its products from time to time and any potential liabilities related to securities lending or other indemnification obligations; and (29) the impact of problems, instability or failure of other financial institutions or the failure or negative performance of products offered by other financial institutions." --- (BLK, sec filing, 2024/Q1)

"We did that in the past and we will continue to do that going forward. And the last point on regulatory environment, it is a tough environment as you can see day in and day out." --- (JPM, event transcript, 2024/05/20)

"While we remain confident in our ability to produce strong returns and manage risk across a range of scenarios, the economic, geopolitical, and regulatory uncertainties that we have been talking about for some time remain prominent, and we are focused on being prepared to navigate those challenges, as well as any others that may come our way. And with that, let's open up the line for Q&A." --- (JPM, earning call, 2024/Q1)

"But if this continues and you do continue to see this sort of regulatory push, How does that impact your strategy?How does that impact how you think about capital allocation and just the optimism generally about hitting your financial returns?" --- (JPM, event transcript, Investor Day, 2024/05/20)

Performance Metrics and Effectiveness

Actively managed ETFs are evaluated using various performance metrics, including liquidity stress testing (SCHW), margin variability elimination (BLK), client flows, and disciplined expense management (IVZ). Increased client interactions and net flows into investment advisory solutions further reinforce their effectiveness and client confidence (SCHW).

"We employ a variety of metrics to monitor and manage liquidity. We conduct regular liquidity stress testing to develop a view of liquidity risk exposures and to ensure our ability to maintain sufficient liquidity during market-related or company-specific liquidity stress events." --- (SCHW, sec filing, 2024/Q1)

"Furthermore, this metric eliminates margin variability arising from the accounting of revenues and expenses related to distributing different product structures in multiple distribution channels utilized by asset managers." --- (BLK, sec filing, 2024/Q1)

"client flows, needs to come back. So those are some of the things that we’re focused on from a growth standpoint and from an expense standpoint, continuing to be disciplined with the expense base and using opportunities to rotate our expense base to areas we anticipate will grow going forward, which we continue to highlight." --- (IVZ, earning call, 2024/Q1)

"Total client interactions with Schwab were up 17%. And as they engaged more, they also took the opportunity to seek our help more often, with net flows into our investment advisory solutions up almost 70% quarter over quarter. All these metrics reinforce the confidence our clients have in us, and each of them provides support for our optimistic view of the future." --- (SCHW, event transcript, 2024/04/15)

Investor Sentiment and Behavior

Higher investor sentiment leads to increased engagement and investment, as seen with Charles Schwab. Improved sentiment in equities and strong earnings seasons, noted by JPMorgan Chase, also drive market activity. BlackRock highlights the impact of inflation and corporate earnings on sentiment, while Schwab observes bullish sentiment influencing client cash balances.

"I think the more significant impact is that at a time when the markets are when clients are feeling more enthusiastic, when investor sentiment is higher, they do tend to put more money into their accounts, both cash as well as they're more engaged in their accounts. And what we've seen over time is that when clients are more engaged in the investing process, that is a period of time when we tend to win." --- (SCHW, event transcript, 2024/04/15)

"We're seeing in equities improved sentiment, a strong earnings season, volatility that's underpinning secondary market and client activity." --- (JPM, event transcript, 2024/05/20)

"U.S. stocks have slid from their highs as inflation proves sticky. We think that makes Q1 corporate earnings results even more important for market sentiment now. Read more \ud83d\udc49 https://t.co/jnUqtEy1jU https://t.co/5PRBGV78De" --- (BLK, Twitter, 2024/04/23)

"Now despite the influence of typical seasonal pressure to start the year coupled with atypically bullish, very bullish investor sentiment, Client cash balances have largely trended consistent with our expectations despite rates remaining higher than the Fed and the market predicted earlier in the year. And all indications support that we are in the very late innings of client cash realignment activity." --- (SCHW, event transcript, 2024/07/16)

Competitive Landscape and Market Positioning

Schwab leverages its combined strengths with Ameritrade to enhance scale and efficiency, positioning itself strongly in the ETF market. Invesco explores partnerships to expand its market reach, while BlackRock boasts a robust pipeline across diverse channels. JPMorgan Chase emphasizes its unparalleled value proposition, underscoring its competitive edge.

"And we will do so from a position of strength, having fully combined the best of Schwab and Ameritrade to offer our clients a no trade-offs experience. Our ability to increase our scale while also continuously driving efficiency in our operations remains one of our key competitive advantages." --- (SCHW, earning call, 2024/Q2)

"the distribution space. I think where we could see some partnership opportunities is maybe as we bring multi alternatives to market for mass affluent or for small institutions in places where we're not choosing to participate in the private market space, like private equity, maybe some elements of infrastructure." --- (IVZ, conference, 2024/05/31)

"This is driving accelerating momentum with a strong pipeline that has some of the best breadth of opportunities across all our client channels and regions that we've ever seen." --- (BLK, earning call, 2024/Q1)

"But we really do think that our overall value proposition and competitive position here is second to none. And so, we're looking forward to the" --- (JPM, earning call, 2024/Q1)

"Walt, maybe you could start with this one. It's a question on retail competitive landscape." --- (SCHW, event transcript, 2024/04/15)

Future Growth Projections and Trends

BlackRock projects 5% organic growth driven by investment management and technology mandates, supported by demographic trends shaping future investment returns. Sustained growth and accelerating momentum are attributed to client trust and shareholder dedication.

"Diverging demographic trends across the globe are a #MegaForce set to shape investment returns now and in the future." --- (BLK, Twitter post, 2024/04/09)

"And I think what Larry is getting at, we've been selected for a breadth of mandates across investment management and technology that we see supporting 5% organic growth and will fund over future quarters." --- (BLK, earning call, 2024/Q1)

"Our sustained growth, our accelerating momentum are made possible by the trust of our clients and shareholders and the dedication of all the BlackRock people. Across our" --- (BLK, earning call, 2024/Q1)

Risk Management Strategies

Aligning asset duration with liabilities, focusing on low credit risk securities, active portfolio monitoring, diversification, and understanding clients' risk tolerance are key risk management strategies for actively managed ETFs. Additionally, a differentiated approach to investment management and comprehensive client services, including education, further enhance risk management.

"We align our duration of our assets with the duration of our liabilities, And we focus our investing activity on securities that have very, very little credit risk, most vast majority of them are backed by the government, that have a lot of liquidity and present relatively little convexity risk.Now going forward, as we seek to manage our capital levels inclusive of AOCI, we're going to need to be mindful of the size and duration of our available for sale portfolio." --- (SCHW, event transcript, 2024/05/22)

"The Country Risk Management group actively monitors the various portfolios which may be impacted by these developments and measures the extent to which the Firm’s exposures are diversified given the Firm’s strategy and risk tolerance relative to a country." --- (JPM, sec filing, 2024/Q1)

"And we've intentionally organized ourselves to serve clients across their entire whole portfolio, Whether that's through an entire outsource solution or tailored portions of it, we bring a differentiated approach across investment management, technology and risk." --- (BLK, event transcript, 2024/07/01)

"We're providing them all the tools and services that they need.We spend a lot of time trying to understand, especially if they have a relationship with a financial consultant, what their investment objectives are, what their risk tolerance is." --- (SCHW, event transcript, 2024/05/22)

"Any firm can say they have a form of service. We believe the combination of those 2 with education on top of it is an absolute differentiator for us.And I'd be remiss if I didn't talk about sort of risk management permeating through all of that." --- (SCHW, event transcript, 2024/05/22)

Cost Structures and Fee Analysis

Actively managed ETFs are seeing growth in base fees and securities lending revenue, as highlighted by BlackRock's 8% year-over-year increase. Invesco's net savings of $60 million and higher service and distribution fees reflect efficient cost structures. Charles Schwab emphasizes the importance of recurring fee-based revenue for a resilient business model.

"First quarter base fee in securities lending revenue of $3.8 billion was up 8% year-over-year and up 5% sequentially driven by the positive impact of market beta on average AUM and positive organic base fee growth." --- (BLK, earning call, 2024/Q1)

"On an annualized basis, we have achieved $60 million in net savings, exceeding our $50 million target for 2024." --- (IVZ, earning call, 2024/Q1)

"But on a relative basis, very, very bullish on the opportunity to add more of this recurring fee based revenue for all the reasons that Nishu talked about. And that will create an even more resilient, even more diversified all weather business model. Now our cost structure is a very important" --- (SCHW, Investor Day, 2024/05/22)

"There are sort of liquid alternatives business, we've reached $167 billion of assets, roughly $140 billion fee paying." --- (BLK, earning call, 2024/Q1)

"driven by the shift in our asset mix just discussed. Service and Distribution fees increased $43 million due to higher fund-related fees and higher AUM to which the fees apply, but this is largely offset by third-party distribution, service and advisory expenses that are passed through from Service and Distribution fees." --- (IVZ, earning call, 2024/Q1)