The ETF market is entering a new phase in which growth is increasingly concentrated at opposite ends of the cost spectrum. While ultra-low-cost passive products continue to attract substantial assets, active and alternative ETFs are also gaining ground, suggesting that investors are increasingly willing to pay higher fees when a product offers a sufficiently differentiated source of returns.
Jonas Andersson, who covers institutional investors and asset managers on the ETF and derivatives sales desk at SEB, says net inflows into active and alternative ETFs, as a percentage of assets, are growing rapidly, potentially faster than those into traditional passive products. “Active and alternative ETFs have really been on the rise. You can see it in the flows across the market,” Andersson tells HedgeNordic.
He sees the development as part of a broader bifurcation in the ETF market, where investors are increasingly choosing either the cheapest available beta or products that can demonstrate a clear value proposition. When ETFs are divided into three groups by total expense ratio, the highest-fee segment has recorded the strongest percentage growth in assets this year, while the lowest-cost ETFs have also grown at a high double-digit rate. The middle segment, meanwhile, has seen comparatively limited growth.
“It’s almost like a bifurcation in the ETF market, where people either invest in value-add products or focus on low-cost passive products.”
Jonas Andersson, Strategic ETF and Derivatives Sales & Advisory at SEB Investment Banking.
“It’s almost like a bifurcation in the ETF market, where people either invest in value-add products or focus on low-cost passive products,” Andersson says. “It goes to show that active ETFs and alternatives need to have a good value proposition if they want to charge a higher fee.”
The Investor Case for Active ETFs
The appeal of active and alternative ETFs lies not only in their exposures but in the flexibility of the ETF structure. Andersson sees strong demand for active, beta-plus and thematic baskets that depart from traditional benchmarks through ESG tilts, systematic positioning or other differentiated approaches. For institutional investors, the appeal is reinforced by the wrapper’s operational advantages.
“An ETF – regardless of if it is active or passive – really excels at trading,” Andersson explains. An ETF can be traded through existing equity-market infrastructure, providing intraday liquidity and visibility while avoiding some of the manual processes associated with subscriptions, redemptions and traditional fund administration. Delivery-versus-payment and integration with existing settlement, reconciliation, risk and back-office systems can also create a more efficient operational framework.
The intraday nature of the instrument can also be useful when investors need to monitor or adjust exposures dynamically. Rather than waiting for a daily NAV to understand the impact of market movements, portfolio managers can observe the market value of an ETF position throughout the trading session. “If you have a portfolio and the market or a sector goes down, you know in real time what that does to your portfolio,” Andersson notes.
Not Every Strategy Belongs in an ETF
The same characteristics that make ETFs attractive to investors, however, impose constraints on asset managers seeking to bring less liquid or highly dynamic strategies into the wrapper. According to Andersson, the format works best when the underlying strategy is sufficiently predictable for market makers to price and hedge efficiently. “Market makers look for predictability and, especially for active strategies, a predictable investment process,” he says.
“Market makers look for predictability and, especially for active strategies, a predictable investment process.”
Jonas Andersson, Strategic ETF and Derivatives Sales & Advisory at SEB Investment Banking.
Liquidity is therefore central to the economics of active and alternative ETFs. The less liquid the underlying assets, the greater the potential bid-ask spread required by market makers to compensate for hedging risk. If a market maker cannot reliably determine or hedge the underlying exposure, the cost of trading the ETF rises.
The Issuer Perspective
Asset managers also need to consider whether the ETF structure makes economic and strategic sense for them. The first consideration is fees. ETFs are generally associated with lower fees than traditional fund structures, potentially reducing fee income for the manager. The second is transparency, as ETF structures typically require frequent, and in many cases daily, disclosure of holdings. “You need to disclose underlying portfolio composition, which you may not be disclosing daily today,” Andersson notes.
The third consideration is the target investor base. If a manager primarily serves large institutional clients through mostly bespoke mandates, accounts or setups, the ETF wrapper may offer limited advantages. The case is potentially stronger for strategies targeting retail, wealth-management, family-office, TAA-mandates or other investor segments that value exchange trading, robust investment processes and simplified access, according to Andersson.
Scale Could Become the Next Test
The proliferation of new products is also raising a longer-term question: how many ETFs can the market support? Andersson argues that a fund needs sufficient scale to become economically sustainable. “A standalone strategy requires critical mass in AUM to remain economically viable, unless the issuer can leverage broad platform-level scale across a wider product umbrella,” he says. At the same time, the market already offers exposure to almost every major asset class and investment theme, creating the conditions for a future wave of consolidation.
“A standalone strategy requires critical mass in AUM to remain economically viable, unless the issuer can leverage broad platform-level scale across a wider product umbrella.”
Jonas Andersson, Strategic ETF and Derivatives Sales & Advisory at SEB Investment Banking.
“Everyone’s talking about ETF launches, but no one’s talking about ETF liquidations,” Andersson says. For investors, that raises a practical consideration beyond strategy selection: the longevity, scale and issuer of the product may increasingly matter when allocating to more specialized ETFs.
Why the Nordics Are Different
Despite the broader momentum behind active and alternative ETFs, adoption among Nordic institutional investors remains relatively limited. Andersson attributes part of the difference to the efficiency and strength of the region’s existing fund market, where traditional fund distribution is well established and can accommodate tailored pricing arrangements and established relationships between managers and investors.
He nevertheless expects adoption to accelerate once the market reaches a tipping point. If investors can access familiar active strategies through ETFs at lower cost, he believes more will make the switch. “People who prefer active strategies, especially if they have a shorter time frame in mind and if there’s a similar ETF out there, more people will take that route,” Andersson says.
That tipping point moved closer when Sweden earlier this year adopted legislation to permit exchange-traded share classes in UCITS funds. “The share class already has the assets and the cost base of the fund behind it. You do not have to build scale from scratch,” Andersson says.
Fixed Income May Offer the Next Growth Opportunity
While Sweden remains heavily equity-oriented, Andersson sees fixed-income ETFs as one of the areas with the greatest potential for growth in Nordic active and alternative ETFs. “I wouldn’t be surprised if fixed income would be a growing market in the Nordics in the coming years,” he says. Andersson points to data showing that fixed-income and credit strategies have generated relatively high levels of alpha compared with their benchmarks, although he cautions that this may also reflect shortcomings in the construction of some fixed-income indices.
“I wouldn’t be surprised if fixed income would be a growing market in the Nordics in the coming years.”
Jonas Andersson, Strategic ETF and Derivatives Sales & Advisory at SEB Investment Banking.
The ETF wrapper could add another layer of appeal. Trading a fixed-income ETF can be operationally simpler than accessing similar exposures through OTC derivatives, particularly for investors who value standardized execution and liquidity. This could make active fixed-income ETFs relevant to both institutional and private investors. The highest absolute growth would probably still come from the equities space though, as the majority of the global ETF flows still go into equity funds.
Ultimately, Andersson sees the development of active and alternative ETFs as part of a broader evolution in the ETF market rather than a wholesale shift away from passive investing or regular mutual funds. The strongest products are likely to emerge at either end of the spectrum: highly efficient, ultra-low-cost beta on one side, and differentiated strategies capable of demonstrating a clear value proposition on the other.
