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ETFs vs ITs

Alliance Trust - ATST


By Jennifer Hill, Alliance Trust Quarterly Newsletter, Spring 2021

ETFs are shiny, new and booming and various fund providers are hailing active ETFs as the next big thing. But it could be argued that active ETFs have been around since the 1880s in the form of investment trusts. We spoke to ten experts to compare the two vehicles.

Exchange-traded funds or ETFs – listed funds that give quick access to a range of indices and assets – are big business in the US where they command more than 23% of assets. Uptake is comparatively low in Europe, where they account for less than 10% of assets, Morningstar data compiled for Alliance Trust shows.

It is a market that is attracting growing interest due to its development from traditional passive ETFs that simply track an index, sector or commodity to ‘smart beta’ ETFs that use a blend of passive and active strategies by following bespoke indices based on particular fundamentals and now ‘active’ ETFs. They have a manager or team making investment decisions and the flexibility to trade outside their normal rebalancing periods.

Active ETFs account for just 0.72% of total US assets and 0.13% of European ones, the Morningstar data shows, but global fund selectors expect them to rise strongly in popularity. Asset allocators reckon active and smart beta ETFs will account for 39% of clients’ overall ETF holdings by 2023, up from 20% three years ago and 31% at present, according to a survey by JPMorgan Asset Management.

James Sullivan, head of partnerships at Tyndall Investment Management, said: “The ETF market has witnessed phenomenal growth in recent years, catalysed by a changing regulatory landscape and a broadening of the ETF market.

“Historically, one would be forgiven for suggesting ETFs are passive in nature, constructed to track an index, but there’s been a purposeful shift towards active ETFs by product providers. This has created a new benchmark for traditional mutual funds and investment trusts.”

James Carthew, head of investment company research at QuotedData, draws several parallels between active ETFs and investment trusts that have zero discount control mechanisms (whereby boards buy back shares to narrow a discount or issue them to reduce a premium).

“Both are listed. Both expand and contract in response to investor demand. Both have a depositary. Both need a fund manager or managers. Both need accounts and must report to investors,” he said. “The more you go into the detail, the more it seems that we’re reinventing the wheel.”

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