As exchange-traded funds (ETFs) gain momentum among Australian investors, VanEck Australia has outlined different perspectives for active and passive funds.

Australia’s ETF market hit record highs at the end of June, surpassing $200 billion in assets under management, and is poised to hit a new milestone of around $230 billion by the end of the year.

Reflecting on this trend, the fund manager’s CEO and managing director for the Asia-Pacific region, Ariane Neuron, noted that Australian investors were increasingly allocating more of their wealth to ETFs.

In doing so, they "benefit from a product that is cost-effective, easy to trade, transparent and provides access to virtually every market, sector and investment style," he said.

However, index-tracking ETFs and active ETFs appear to be telling two very different stories, he noted, with the former seeing "unabated growth from new investors and existing investors increasing their allocations."

In contrast, active ETFs appear to be facing an uphill battle with inflows. The 18 active ETFs listed so far in 2024 have collectively taken just 0.3 percent of the industry's total net inflows year-to-date, amounting to about $36 million in net inflows, Neyron explained.

"A lot of them are copying already available unlisted funds," he said.

Additionally, although active ETFs account for a third of the total Australian ETF market, he noted they hold just 21 per cent of funds under management and also face the threat of increasing fund closures.

"It paints a pretty bleak picture of active ETFs," Nairn said.

"It is understandable that many active fund managers have seen the growth in the ETP industry and believe that simply participating will lead to flows, rather than assessing the sustainability of their strategies in light of the consistency of performance, lack of transparency and higher fees .

"However, there are many more active ETFs that will simply be ASX listings of existing unlisted approaches that will be listed on both the ASX and Cboe for the remainder of the year, but there is also an increasing likelihood of potential delistings as very active ETFs remain on unviable FUM due to lack of flows.”

For investors and advisers, that prospect means they need to reassess the "survivability" of strategies, Nairn said.

About 64 of the 119 active ETFs listed in Australia have less than $50 million in funds under management, he pointed out, while about 20 active ETFs "have not traded at all this year".

Last month, Mark Jockum, product and investment strategist at Global X, also noted that deal-loving Australians were slowly warming to active offerings.

In its latest ETF report in July, Global X found that four of the five least popular products of the year were active in nature.

"I think Australian investors still have this perception, rightly so in our view, that a lot of the simple arithmetic of the share market and some of the statistics behind it is that active managers are still struggling to outperform their benchmark and outperform -broad ETF, like a low-cost vanilla ETF,” Jocum told InvestorDaily.

“So that's where you see a lot more money going into just your very broad-based, low-cost products. Because, naturally, that's where a lot of people think, 'If I can get exposure to a certain asset class, why not control one of the areas that investors can control,' which is the fees they pay."

"The future is active"

Meanwhile, earlier this year a number of investment executives outlined a much more optimistic outlook for active offerings.

Speaking at ASX Adviser Day 2024 in May, Rory Cunningham, senior manager, investment products at ASX, said the exchange was "seeing increasing interest in active ETFs, a trend prevalent not only in Australia but also overseas".

That same month, Dan Watkins, CEO of Asia-Pacific at JP Morgan Asset Management, also expressed that the trajectory of the ETF market is "undoubtedly active."

"Inflows into active ETFs are projected to grow at a compound annual growth rate (CAGR) of 37 percent over the next five years, outpacing the 15 percent growth for passive indexes," he told audience members at the Morningstar Investment Conference 2024.

"This trend is supported by the fact that 72 percent of ETF buyers plan to increase their allocation to active ETFs over the next two to three years."

Active ETFs currently make up only 4 percent of the total ETF market in Asia Pacific, but this segment is growing every year.

Watkins emphasized, "We believe the future of ETFs is undoubtedly active, and active is the revolution happening within ETFs and the asset management industry as a whole."