The strategy, which has a 0.55% total expense ratio, will list tomorrow (15 January) on the London Stock Exchange. It is also available to European investors on the Börse Xetra and Borsa Italiana.

Classified as an article 8 SFDR fund, it aims to offer investors access to commodities associated with energy transition themes such as electric vehicles, transmission, charging, energy storage, solar, wind and hydrogen production.

See also: SJP equity fund aligns with SDR Sustainability Focus label

The ETF will track the underlying WisdomTree Energy Transition Metals Commodity UCITS Index.

Through a partnership with data solutions firm Wood Mackenzie, the selection and weighting of the underlying metals will be based on a forward-looking rating system.

The metals are given an ‘intensity rating’, which combines the demand growth forecast for the metal over three years with a market balance rating that reflects whether the metal is under or over supplied. The portfolio then rebalances twice a year.

Nitesh Shah, head of commodities and macroeconomic research, Europe, at WisdomTree, said: “Metals will be crucial to advance the energy transition. Whether it is to power more electric vehicles or create solar panels, it’s hard to see a world where the development of energy transition technologies is not dependent on the supply of some key metals. However, the challenge is to ensure that the technologies needed to achieve the energy transition are produced at scale.

“The challenge for investors is to navigate through the dynamics of technology shifts, trade policies and sudden increases in metal supply. The expertise offered by our partnership with Wood Mackenzie and a methodology that incorporates both supply and demand drivers help the strategy remain highly adaptive to the evolving market.” 

The latest Man versus Machine report from AJ Bell showed that only 31% of active managers have outperformed a passive alternative in 2024. That’s consistent with the pattern over the past decade, where about one third of active funds outperformed their passive equivalent.

Unsurprisingly, active managers have fared worst in the Global and North American sectors, where they have struggled to match the pace set by the technology giants.

The market environment of recent years has unseated some of the best and most respected active managers, particularly those with a ‘quality’ skew to their portfolios. In mid-2024, Nick Train, manager on the Finsbury Growth & Income trust, admitted after a tough set of results: “We really should be able to do better than this and if we can’t, then I absolutely share shareholders’ growing impatience.”

Performance has improved subsequently, but it has been a tough period. FundSmith Equity has also had a tough run of performance, underperforming the MSCI World Index for four calendar years in a row.

Active funds have also had to contend with significant outflows. AJ Bell points out that retail investors have withdrawn over £100bn from active funds in the last three years. Over the past decade trackers have gone from 10.5% of the UK market, to the current level of 24%, growing from £93bn to £359bn.

See also: Analysis: The key questions for asset allocators in the year ahead

Laith Khalaf, head of investment analysis at AJ Bell, said: “Active managers aren’t just suffering in terms of performance relative to their passive peers, they’re losing the battle for flows too. The last three years have witnessed an unprecedented rout for active managers in terms of fund flows.

“Since the beginning of 2022, £105bn has been withdrawn from active funds and £48bn has been invested in passive funds, based on AJ Bell analysis of Investment Association data. The exodus from active funds shows only the most minimal signs of abating, with 2024 withdrawals on course to come in just below those of last year’s record-breaking outflows.”

There have been brighter spots. In Global Emerging Markets funds, for example, 48% of managers have outperformed passive options over five years, with many active managers swerving the problems in China, while passive funds were forced to participate fully in its weakness.

Europe has been another relative bright spot, with 47% of active managers outpacing passives over five years. This may be because weak funds in Europe have not survived.

There is a question over how long this passive dominance can continue. If the US market is a guide, there may be further to run. in the US, the value of assets in passive funds overtook active funds for the first time last year, with more than 50% of the market now managed passively. Khalaf said: “It sets a meaningful roadmap of where the UK investment industry may end up. In other words, don’t bet the house on a revival in active management anytime soon.”

This is a depressing conclusion for active managers, but also for investing in general. It means that capital is allocated on the basis of size rather than merit and may see investment moving towards those parts of the market that need it least.  

It may also be problematic for investors in the longer term. Dan Brocklebank, UK head at Orbis, said: “Global markets are increasingly concentrated in a few large, US-based companies. Investors in global tracker funds are thus becoming more dependent on the performance of a small number of companies.

“Similarly, many large active funds have high exposures to these same names, resulting in high correlations between the largest funds. This makes achieving true diversification difficult.”

What might change the dominance of passive? The most obvious trigger would be a wobble in the technology sector. The gloomy prognosis for active managers assumes that markets continue much as they have for the past decade.

There is no guarantee of that, particularly given the shift in the interest rate environment. History suggests that when markets hit this level of concentration, the reversal can be abrupt and uncomfortable. This may prompt investors to rethink their allocations to passive.

A better performance from smaller companies would certainly help active funds in certain markets. In the UK, for example, active managers tend to have higher allocations to small and mid-cap companies, and their weakness has been a persistent headwind. There are tentative signs of a shift in the outlook. UK-focused equity funds saw their first inflows in 42 months in the month after the budget, according to Calastone.

See also: CIOs name trade wars and concentration risk as 2025’s top concerns

Paul Marriage, manager of TM Tellworth UK Smaller Companies Fund at Premier Miton, said other factors could change the outlook for smaller companies in 2025.

“The chancellor’s Mansion House speech was a good opportunity to change the narrative post budget and her proposals to encourage UK equity investing are helpful, if lacking in detail,” said Marriage. “We expect the first long term asset funds (LTAFs) to start allocating to UK smaller companies in the first half of 2025. These are a very welcome new buyer to the market.” Buybacks and continued M&A could also support the sector.

ESG factors could be another consideration. Active managers are in a better position to ensure strong governance, challenge underperforming management teams, and hold companies to account on environmental or social risks. However, it remains unclear whether investors are willing to pay a premium for it.

Richard Toh is likely to remain an outlier, with most active managers holding out for a change in the unusual environment that has prevailed over the past decade rather than opting for a dramatic mea culpa. Nevertheless, for the time being, active managers remain under pressure.

This story originated on our sister title, PA Adviser.

An MPS serves as a kind of ‘portfolio blueprint’ for investors wishing to opt in, but each client keeps their own pot of wealth invested rather than pooling it all into an individual fund. This means the end client can see exactly where their money is held at any one point. In contrast, a multi-asset or fund-of-fund would not allow for the same level of transparency.

However, the individual nature of the MPS comes with its own complexities. Each time a rebalancing occurs in the portfolio, the trades take place for each investor. This can cause complications in terms of capital gains tax. It also creates difficulties for investments in vehicles such as ITs and ETFs, which serve as individual trades as they are publically listed entities in their own right, rather than collectives with unlimited units available to investors.

Open-ended funds can be traded in partial shares, meaning if an investor cannot afford an entire share, they can purchase a percentage up to the fourth decimal point. But in the UK, ETFs and ITs must be purchased as a whole unit. When it comes to including the growing field of ETFs into an MPS, the investment must be large enough to cover the cost of the ETF, even if it makes up just a few percentage points of a portfolio.

Prices of ETFs span a wide range, with some reaching £900 a share. Many sit under £100. But if an MPS were to hold 1% of its portfolio in an ETF priced at £50, clients would have to hold at least £5,000 in the portfolio to be able to invest.

John Husselbee, head of multi-asset at Liontrust Asset Management, says the challenge comes from the nature of company law, which is applicable to ETFs and ITs because they are listed entities.

“We do not invest in investment trusts or ETFs because we’ve never found a comfortable way of handling this,” Husselbee explains.

“If my £100 client came along and I am selecting an investment trust, to get the exact weighting I need, 4% or something like that, I might have to buy 7.235 shares. If I go to the market and say to my trader, I’ll buy 7.235 shares, he’ll say, ‘No, you can’t. You can buy seven or eight shares, but you can’t buy any fractions of shares’.”

Read the rest of this article in the November issue of Portfolio Adviser magazine

The firm launched three thematic ETFs in April focused around the themes of artificial intelligence, genomics and innovation, while Ark also announced partnerships with firms such as eToro and Evidence Based Investing (ebi) to include their products in MPS ranges.

“Between us in Europe and Cathie Wood and her team in the US, we’ve been surprised by how many additional synergies we’ve uncovered since we did the deal,” said Ark Invest Europe head and Rize ETF co-founder Stuart Forbes, reflecting on the firm’s first year.

“We were focused on a couple of main areas and benefits when we were doing that transaction, but we’ve since realised it’s so much more. We have been a specialist in sustainable and impact investing here in Europe, and there’s a whole element there which we can take more globally.

“We’re actually going to be launching some products in the US market. We’ve had conversations with a number of players internationally, so there’s been a whole new element that’s come to the table.”

Thematic flows

In April, the firm rolled out the ARK Artificial Intelligence & Robotics UCITS ETF. Since launch to the end of October, the fund returned 24.8% and is up higher on the back of the US election result.

“It’s special to Europe. We haven’t launched it anywhere else, and it’s been a revelation for us in terms of how well it’s been received,” Forbes says.

 “It’s very early, and obviously a lot of investors require quite a long track record before they can allocate in meaningful size, but it’s performing exceptionally well and we are very pleased with that. We have a big pipeline and conviction in that product.”

See also: Ark Invest’s Wood and Rize co-founder Forbes on their new joint venture into European ETFs

Since launch to the end of October, the strategy has gathered $9.3m assets.

Forbes admits that it has been a tough market environment to launch in, with the thematic sector in general struggling to attract inflows over the last year.

According to Morningstar, Europe-listed thematic ETFs suffered €1.6bn outflows in Q3 2024, bringing total assets in the sector down to €35.6bn.

“Its been a tough period for thematics generally,” Forbes says. “Over the last couple of years, performance has not been great. The core benchmarks have outperformed, and that has been a story across the board.

“We’re very aware of that, but we have a mixture of products. What we’re excited about is interest rates and inflation starting to come down, which bodes very well for us. We do have something for all weather in our sustainable infrastructure strategy, which has added more to our repertoire of products that we can offer clients.

“X trackers has absolutely dominated the thematic ETF market in terms of flows over the last year, but everybody else has had a poor time and this has not been good. We are 1.27% of total thematic ETF assets in Europe. Yet, we’ve had an inflow in this last year [across all funds]. I think we’ve done pretty well, considering the market we’ve been in.”

“If you look at sustainable thematics, the market has been in outflow over the last year. In the last year, we’ve taken just under $100m in inflows. We launched our Rize Global Sustainable Infrastructure and the US Environmental Impact funds last August. Both of those have taken in $94m and $80m respectively which is an amazing effort, considering they’re brand new funds and the market conditions that we’ve had.”

Partnerships

The firm is also looking to partner with further companies to help manage MPS ranges following its announced deals with ebi and eToro this year.

Ark partnered with platform eToro in October to launch a technology and innovation-focused ‘Smart Portfolio’, named ARK-FutureFirst.

The portfolio, which aims to achieve high levels of growth for investors through exposure to technology, healthcare and sustainability sectors, comprises seven equally-weighted positions in ARK Invest’s UCITS ETFs.

A month earlier, ebi launched a new index-tracking MPS range, consisting of 11 portfolios with an ESG focus – run by Ark.

“A lot of our time has been spent helping to educate clients on when they go into launching thematic funds of funds or strategies that embed ETFs, or even sustainable models. There are a lot of people launching these now — a lot of people launched them in 2022 and early 2023 and then have been hurt by performance and a lack of flows.

“But we’re seeing a lot of people looking at it now, getting ready for this next wave of equity allocation that everybody hopes happens over the next year or two as interest rates continue to come down.”

The ETF will offer exposure to the 20 largest S&P 500 stocks, in what the firm said is an effort to provide European investors with a tool to better manage their market-cap exposure.

The ongoing fee is 0.2% and the ticker is SP20.

BlackRock said options available in this area have not kept up with how the market has developed, noting that in 2000 the entire US stockmarket was valued at $15trn, whereas now this is the value of the top eight companies only.

See also: BlackRock Sustainable American Income Trust changes name ahead of SDR

More importantly in the firm’s view, the top 20 largest companies in the S&P 500 have contributed more than two-thirds (68%) of the index’s return over the past three years.

BlackRock added the ability to easily access or customise US market-cap exposure in an ETF is required by various types of investor, including first-time investors, portfolio builders, institutional investors, and financial advisers.

See also: Invesco launches defence, cybersecurity and AI ETFs

Brett Pybus, head of iShares EMEA product strategy, said: “Now is the time for investors to rethink their market exposure.

“With this ETF, European investors are now able harness the power of growth and innovation within the largest US companies in a targeted way. The performance dispersion within the S&P 500 has created a need for precise exposure to US equities.” 

This article was first seen in our sister publication, PA Adviser

Most of the 180 professional investors in Europe it spoke to were equally interested in holding a blend of both active and passive ETFs in their portfolios, with only one in 10 having a preference for a single strategy.

Rahul Bhushan, managing director of the firm, said: “This survey, despite its small sample size, challenges the often-simplistic narrative of active versus index investing. It’s not a binary choice.

“Instead, professional investors emphasise the importance of well-constructed ETF products and the quality and clarity of the investment process, irrespective of whether it is active or index.”

See also: Will active ETFs prove to be as successful as passives?

But choosing to go down an active or passive route in certain sectors can have a big impact on outcomes, Bhushan added.

Those surveyed were most interested (83%) to invest in AI-dedicated ETFs, followed by cybersecurity (61% ), innovation (57%), sustainable infrastructure (41%) and sustainable food (40%) – yet different approaches thrive in all of these themes.

Many ETFs claiming to specialise in AI, for example, are simply “Nasdaq 100 proxies” when you take a closer look, Bhushan said.

“When investing along the broad value chain of a general-purpose technology, such as AI or blockchain, an active approach might be sensible, as standardised definitions are lacking, and no two investors with a research-powered process are likely to end up with the same basket of AI companies,” Bhushan explained.

See also: Calastone: The ETF industry ‘desperately needs standardisation’

On the other hand, active managers struggle to add value in more efficient themes such as cybersecurity or food, highlighting the need for investors to utilize both strategies if they want to get the most out of markets.

Bhushan said: “For clear-cut sectors or industry groups, such as cybersecurity or food, an index approach makes the most sense—not because of a lack of conviction in specific stocks (we exclude many companies from our index ETFs based on factors like financial strength and volatility), but because these sectors are easier to map and can be delivered at a lower price point as an index.”

Crypto’s entry to the mainstream has long been trumpeted, but it’s never quite happened. Bubbles have repeatedly formed and burst, and many people have been burnt along the way. However, in January this year, the US Securities and Exchange Commission (SEC) approved the first US-listed ETFs to track the spot price of bitcoin.

The approvals mean US retail investors now have a regulated way to invest in bitcoin through their brokerage accounts, gaining exposure to the price without having to hold the complex and unregulated cryptocurrency itself. Last month, the US regulator also approved the sale of spot ether ETFs by certain exchanges, although no products have been approved as yet.

US investors have been able to invest in crypto futures ETFs since 2021, but they can now gain a ‘purer’ price exposure through exchange-traded funds (ETFs) backed by direct holdings of the relevant digital currencies. The news has driven a strong crypto price rally amid expectations that a new set of buyers will now get onboard.

Green shoots

Is this the gamechanger the market’s been waiting for? And what are the implications for those who manage or advise on client money here in the UK?

Last month, the Financial Conduct Authority (FCA) approved the UK’s first spot bitcoin and ether exchange-traded products (ETPs), with WisdomTree, 21Shares and Invesco all getting the go-ahead for London Stock Exchange listings of their crypto offerings. These products are structured as exchange-traded notes (ETNs) rather than ETFs – a structure already used widely across mainland Europe, where ETPs have been available to both professional and retail investors for several years.

In the UK, though, the ban on the sale of crypto products to retail investors remains firmly in place, with the regulator citing “the harm they pose”. Alongside its decision to allow the creation of a UK-listed market segment for crypto-backed notes, the FCA issued a reminder that crypto assets are “high risk and largely unregulated” and that investors “should be prepared to lose all their money”.

Read the rest of this article in the July/August issue of Portfolio Adviser magazine

For some industry heavyweights, such as exclusively active manager JP Morgan Asset Management, this has meant the less-travelled path of active ETFs.

Gaining ground

While overall active open-ended funds have experienced outflows for the past two years, active ETFs have managed humble, but ultimately positive, inflows. According to Morningstar Direct, in 2022, open-ended active funds in Europe lost €245bn (£207.4bn) in net flows while active ETFs managed €4bn in inflows. Again in 2023, open-ended active funds took a €163bn loss, while active ETFs grew by another €6m.

See also: BlackRock launches five iShares active ETFs

Still, the open-ended fund market for active funds in Europe far outpaces ETFs. Open-ended active funds made up 73% of the market share in 2023, while active ETFs provided 0.31%. Active ETFs have been increasing their share of the space since 2018, when they accounted for 0.09% of the market, while active open-end funds have been on the downturn for the past decade, decreasing from 87.6% of market share in 2014 to 73.2% by 2023.

Sheridan Admans, head of fund selection at Tillit, says the structure of the active ETF could “invigorate competition” between active fund managers. “This could result in better products, reduced fees and increased transparency. However, traditional managers may perceive active ETFs as disruptive, leading to cautious adoption among certain firms,” he says.

See also: Fidelity brings Bitcoin ETP to the London Stock Exchange

Noting, with time, he believes active ETFs could prove useful to a broader audience.

Michael Delew, WisdomTree’s head of capital markets, agrees active ETFs could, and should, appeal to all investors. “Flexibility is one of the main advantages. An ETF is an investment wrapper, but it is a superior wrapper,” he says. “ETFs have many uses and can contain almost any type of asset or strategy.”

Read the rest of this article in the July/August issue of Portfolio Adviser magazine

European ETFs had a strong start to the year, raking in $106.6bn of net new assets (NNA) in the first half of 2024 – up 46% compared to the first six months of last year. It was beaten only by the $112bn inflows seen in the first half of 2021, its strongest start to a year on record.

However, Invesco’s head of ETF EMEA Gary Buxton said it was uncertain whether these strong inflows could persist into the second half of the year.

“While the macroeconomic backdrop remains supportive for financial markets generally and should continue to lead strong demand for ETFs in the second half of the year, political and geopolitical risks remain,” he said.

“The snap election in France appears likely to lead to increased uncertainty in coming months while the main focus for the second half will be the US presidential election in November.”

See also: Calastone: The ETF industry ‘desperately needs standardisation’

Despite geopolitical uncertainty, equity ETFs were highly popular in the first half of the year, taking in $84.3bn of new money. These inflows were more than double the amount they received in the first half of 2023, and brought the total AUM in equity ETFs to $1.45trn.

Global equity ETFs received the highest inflows in the second quarter at $13.4bn, but this slowed slightly from the $28.1bn they took in the first quarter. US equity ETFs came in at a close second at $13.2bn over the three-month period.

Investors may have been enthusiastic on equity ETFs this year, but they are becoming increasingly conscious of concentration risk, according to Buxton.

“Questions over concentration in markets are likely to persist, and we have seen modest flows returning to equal weight approaches as the performance gap has widened.

“Delivery of easier monetary policy in the second half of the year may prompt investors to look again at some of the other unloved parts of the market with thematic exposures a potential beneficiary.”

See also: LSEG: ETF assets increase to $12.5trn in May

As the assets managed by ETFs globally surpasses $12.7trn, Calastone found that 40% of asset servicers want the increasing complexity of these products to be addressed.

The firm’s product director David McGuinness said the ETF industry is at a “pivotal moment” where automation and standardisation should be a top priority to ensure its continued success.

“In the primary market on which ETFs are created, we see many of the problems that we are working to solve in mutual funds,” he said.

“Most asset servicers rely on outdated technology designed for mutual funds, but adapted for ETFs. These individual systems desperately need standardisation, too often still involving manual processes and spreadsheets, resulting in inefficiencies and higher operational risks.”

These issues have been exacerbated by the new T+1 settlement cycle in the US, which shortens the settlement period following a trade from two business days to one.

Calastone found that 38% of ETF issuers see the move to T+1 settlements as the biggest challenge to ETF primary market servicing.

McGuinness said: “These changes create mismatches in settlement cycles and increase the complexity of managing ETFs across different markets. Authorised participants must now navigate different settlement cycles across various markets, increasing operational complexity and costs.”

Europe could follow suit in adopting a T+1 settlement cycle which could offer standardisation across markets, but in the meantime, 86% of respondents said the cost and speed of making change requests was a concern for their business.

See also: French election: ‘Worst-case scenario’ avoided, but fresh uncertainty looms

While bonds and equities excelled, mixed assets, money market funds and alternatives all dipped into the red for the month, with €7bn, €7.3bn and €1.2bn in outflows, respectively. Real estate experienced a downtick of €300m while commodities inched upwards €300m.

Detlef Glow, head of Lipper EMEA Research said the results do not seem out of the ordinary given the “uncertain” market environment, but may signal investors are in a “risk-on mode”.

See also: Bfinance: ESG spending has ‘increased materially’ for 89% of asset managers

“With regard to the inverted yield curves for the Eurozone and other major economies in the world, it is somewhat surprising that European investors favoured bond products over the course of the year,” Glow said.

“That said, the inflows into bonds might be seen as a sign that European investors may anticipate the ending of the interest hiking cycle of central banks around the globe led by the ECB rather sooner than later. That said, the U.S. Federal Reserve seemed to postpone its first interest rate cut further.”

In 2024 so far, global markets have led sales, with equity global raking in over €35bn in the first five months of the year while bond global USD brought in over €25bn. Target maturity bond EUR 2020+, money market EUR and equity US filled out the top five for sales.

See also: Liontrust’s pre-tax profit slides 23% in full-year results

“Given the current market environment, it was not surprising to see so many mixed-assets classifications on the opposite side of the table since European investors seem to be readjusting their portfolios to the new environment in the bond markets after the central banks around the globe started to end their interest rate hiking cycles and reduce their currently high interest rates over the course of 2024,” Glow said.

BlackRock maintained its domination of fund inflows, with over €25bn in May and over €40bn for 2024. Goldman Sachs welcomed €4.1bn in flows, while HSBC brought in €3.4bn.

Those domiciled in the US received the highest inflows throughout the month ($91.4bn), followed by ETFs in Ireland and Luxembourg, at $22.5bn and $6bn respectively.

Overall, the assets under managed by the global ETF industry increased from $11.9trn to $12.5trn throughout the month. The majority ($9.7trn) is held in equity ETFs, while a further $2.2trn is invested in fixed income.

This was reflected in May’s flows, with equity ETFs proving the most popular ($80.5bn) and bond ETFs trailing in at second ($37.2bn).

The report’s author and LSEG’s head of Lipper EMEA research Detlef Glow said potential interest rate cuts have inspired confidence in markets this year.

However, the Federal Reserve’s comments in the first quarter implying that cuts could come later than anticipated may have “caught some investors on the wrong foot”. This could have led to higher inflows in bond and money market ETFs, according to Glow.

He noted that the outlook for equity ETFs in general may not been as bright as it has been so far this year. Company earnings have been encouraging in the first quarter, but any failure to meet expectations could have volatile consequences on markets.

Glow added: “There were some companies which didn’t meet the expectations of the analysts and saw their stock prices declining respectively. These market reactions on lower-than-expected numbers showed how vulnerable the markets are.”