In Search Of An Active ETF Model

January 16, 2014

Fund manager Swiss and Global, which has listed four active equity ETFs on the German Stock Exchange, says its ETFs’ annual charges of 60-70 basis points are less than half those of its in-house mutual funds that follow equivalent strategies.

“Clients are looking for cost-efficient structures that are transparent and liquid,” Swiss and Global’s head of product, Dirk Kubisch, told “Active ETFs are a growth area and we expect to see high demand down the road.”

An exchange listing may benefit fund issuers, given the ongoing reforms of the region’s rules for financial product distribution, says the head of exchange-traded products at one of Europe’s major trading venues.

“The Netherlands is in the process of introducing its version of the UK’s Retail Distribution Review, under which inducements to fund distributors were banned, and issuers are looking for more efficient ways to distribute funds. Our NAV trading facility seems a perfect fit for many of them,” NYSE Euronext’s Pedro Fernandes told

The active ETF concept still has sceptics, particularly if funds offer only limited transparency.

“The fundamental challenge is how to conduct an effective active strategy without disclosing how you do it,” Feargal Dempsey, an independent ETF consultant and formerly head of product strategy for iShares in Europe, told

“If you only offer full disclosure after the fact, while some market participants are aware of changes before others, that raises concerns about the release of market-sensitive information, even if you put safeguards like Chinese walls in place. And do you really need an ETF wrapper around every active strategy? So-called smart beta or alternative index strategies are a more logical progression from traditional ETFs than truly active funds in an ETF wrapper,” said Dempsey.

Nevertheless, the signs are that we will see more and more active ETF launches, particularly if US regulators ease the rules.

“Whether or not to use the term ETF for a discretionary fund comes down primarily to marketing and brand strategy, since the disclosure rules for any European UCITS fund, whether the fund is an ETF or not, are essentially the same,” Monica Gogna, partner at law firm Pinsent Masons, told

“If active ETFs take off in the US fund market it’s likely we’ll see a similar trend in Europe,” said Gogna.

NYSE Euronext’s ETP head agrees.

“It will be a natural progression for ETFs to move from traditional, market-weighted indices, to smart beta and then to active ETFs,” Pedro Fernandes told

“But promoters of active ETFs need to respond to the key features of traditional ETFs: intraday liquidity and price transparency. As long as market-makers are informed of the make-up of the ETF basket, allowing them to create an efficient market, I don’t see why this product can’t be successful.”



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