From Passive to Active—The Development of the ETP Industry

Abstract

Exchange Traded Products (ETPs) are garnering massive interest around the world, and continue to capture a greater portion of fund inflows. ETPs have now garnered over $2 trillion in assets globally, across a variety of asset classes and strategies. Though initially passive, ETPs are now also “active,” both in the strategies/indexes they employ and in terms of their usage, with some ETPs trading their entire Assets Under Management (AUM) on a single day. Much of recent ETP innovation has been focused on alternative indexes, which include smart beta and “alpha”-styles indexes. These indexes seek to generate superior risk-adjusted returns compared to standard market capitalisation-weighted indexes, or offer low correlation to traditional market indexes. As new entrants continue to innovate, ETPs will continue to target niche areas, such as new geographies, asset classes, portfolio-indexes, active ETPs, and more strategic research-led indexes. The result is that indexes associated with more tactical or active investing will find their way into ETP-format, and that the lines between passive and active may appear blurred.