European professional investors intend to increase active ETF allocations by 40% over the next 18 months, according to Fidelity – despite a knowledge-based adoption barrier.
The survey, which comprised 310 professional asset allocators across the UK, Switzerland, France, Italy, and Germany, found that average active ETF allocation was 10.2%, with an intention to increase to 14.6% over the next 18 months.
Some 25% of professional allocators invest at least 25% of their equity exposure in ETFs, and this proportion is expected to rise to 37% over the next 12 months. Fixed income has a lower adoption rate, with only 18% currently assigning their assets to an ETF wrapper, expected to climb to 25% over the same timeframe.
Swiss investors, who currently have the highest active ETF allocations at 15.7%, indicated that they were planning to increase active ETF allocations the most, up to 21.3%. By contrast, UK investors – with an initial allocation rate of 8.1% – only intended to increase exposure up to 11.1%.
See also: Morningstar: European active ETF market triples over three years
The research also found that the ETF label is insufficient to encourage adoption by itself. When judging whether to use an active ETF, 75% of investors prioritised “potential for outperformance” and “liquidity”, with 79% citing cost efficiency.
However, investors report a significant gap between their awareness of active ETFs and understanding of the role they play – a gap likely to be inhibiting adoption, according to Fidelity.
Some 40% of respondents indicated understanding of the different active ETF approaches, yet usage fell to 33% and 32% for high-conviction and discretionary strategies respectively. Benchmark-aware active ETFs appear further along the adoption curve, with 47% using them.
Stefan Kuhn, head of ETF distribution, EMEA, said: “For investors, the distance between awareness and implementation for active ETFs may be longer than in passive. They need more of a reason to own them. That takes a clear understanding of how they can improve their portfolios, trust in the investment process, and evidence that it works.”
There was also substantial divergence regarding the place of active ETFs within a portfolio. Benchmark-aware enhanced active ETFs were considered most likely to become core allocations, with 50% of respondents supporting core adoption.
High-conviction and discretionary active ETFs, however, were more likely to be categorised as satellites, with only 25% and 23% supporting core integration.
Neil Davies, head of ETFs at Fidelity International, said: “The rise of active ETFs is one of the most significant global trends in the investment industry. What started as niche concept has now become a rapidly expanding segment.
“Our research suggests professional investors increasingly see them as a genuine portfolio construction tool”.
