Jake Coulson, Investment Writer | HANetf
The question of whether to use mutual funds or ETFs has historically been a proxy for the active vs. passive debate. ETFs, owing to their history, have often become synonymous with the passive index style of investing. Meanwhile, mutual funds have become associated with active management.
This, however, is now changing. In the first half of this year, actively managed ETFs accounted for a record 25% of global ETF flows. In Europe, they saw $5.9 billion inflows over that period, and now represent over $45 billion AUM.
Indeed, according to our survey, which can be found in our latest edition of the Thematic & Digital Assets Review*, 94% of wealth managers would be likely or very likely to consider an active ETF. So why would an investor choose an ETF for their active exposure?
First, instant execution. ETFs can be bought and sold at the live market price throughout the day, unlike mutual funds which are traded only once a day, at closing price. Market conditions can change from moment to moment, so for investors looking to act with haste, the intraday liquidity of ETFs can be essential.
At the same, investors are attracted to the transparency of the ETF wrapper. ETFs disclose the entirety of their holdings daily. This allows for greater transparency and close to real-time assessment of an investor’s portfolio.
Further to this, there are potentially cost benefits when opting for active ETFs over mutual funds. Even if a mutual fund has lower fund charges, investors must bear the trading costs when units of the funds are bought or sold. This is because the mutual fund manager needs to adjust the portfolio as a result. But ETF trades do not affect the portfolio itself, meaning investors avoid this cost.
These cost benefits are potentially augmented by tax benefits for European investors, especially when investing in Irish-domiciled ETFs. These ETFs tend to have lower withholding tax (WHT) on dividends from global equities – especially U.S. equities. A mutual fund domiciled elsewhere may therefore generate lower net returns.
But perhaps above all, active ETFs benefit from simplicity and accessibility. Mutual funds can be highly complex, with fee structures varying depending on share class. ETFs tend to be more streamlined, presenting investors with a simple, all-encompassing expense ratio. It is therefore easier to grasp the amount being paid and the effect on returns.
ETFs are also readily available through a range of brokerage accounts, including neo-brokers, with low or no minimum investment requirements. Not every investor has massive sums to invest or may want to invest in small amounts over the longer term. Mutual funds often have a minimum spend requirement, which may make them less accessible to certain investors.
Perhaps then, the appeal of an ETF lies somewhere within the combination of instant-access, cost-efficiency, and accessibility – and we are likely still in the early stages of the active ETF revolution. More and more active ETFs are being launched in Europe, and as the range of options increase, so too, perhaps, will the number of investors jumping ship from mutual funds.
*The Thematic % Digital Assets Review | H1 2024 can be found on the HANetf investment website.
