ETFs move from “core” to “satellite” status in portfolios

Stay informed with free updates

Simply register at Exchange traded funds myFT Digest – delivered straight to your inbox.

Exchange-traded funds are increasingly the vehicles of choice for active strategies and short-term tactical use, a new study reveals, highlighting how their historical broad buy-and-hold market origins have much exchange.

Actively managed ETFs that guarantee protection against losses, leveraged or inverse strategies that reset cryptocurrency investments daily top the list of ETF strategies that have most attracted investors in the United States, Europe , in China, Hong Kong and Taiwan, according to the latest Brown Brothers Harriman. survey of more than 300 institutional investors around the world.

While about half of respondents said they use ETFs as “satellites” in their portfolios, only 40% globally and 33% in the U.S. said they use ETFs as a “core” exposure – a surprising result given the extent of the use of passive indices. ETF-based ETFs had become a thing of the past, said Tim Huver, managing director of BBH’s ETF services team.

“We see this as a shift in terms of investor demand towards a greater offering of varied products that can be used in very specific or precise ways, as opposed to the generalized beta of the past,” Huver told the Financial Times.

Active ETFs account for about 7 percent of the estimated $8.6 trillion U.S. ETF market but have attracted about 16 percent of net inflows over the past three years, according to Morningstar Direct data. They have collected more than $78 billion in flows since January, more than double the $31.5 billion they attracted in the first four months of 2023.

Passive ETFs continue to dominate cash flow, bringing in more than $78 billion in April alone and more than $1.6 billion since May 2021, according to Morningstar. However, active ETFs captured more flows than their passive counterparts in April, the first month since August last year.

Buffered ETFs, whose value is capped in exchange for upside limits, have proven particularly popular with investors. And ETFs that use derivatives to provide higher leverage or inverse performance have carved out a niche among traders and retail investors.

Cryptocurrency ETFs remain a topic of great interest for investors globally. Regulators in the United States and Hong Kong approved Bitcoin spot ETFs in January and April respectively, while European investors can access a similar type of product called an exchange-traded note.

“It’s certainly something that many survey participants said they were optimistic about for the year,” said Andrea Murray, head of European business development for ETFs at BBH.