ETFs are fast becoming the vehicle of choice for investors with 82% of respondents to our 2024 Global ETF Investor Survey expecting to increase their use of these funds.

An Evolving Product

When ETFs were introduced nearly 35 years ago, they were passive index tracking products. Today, they have evolved into a far more diverse offering, and now cover active, thematic, and smart beta strategies. Most asset classes are held and offering accumulating, distributing, hedged and unhedged share classes is common.

To date, ETFs have been singular in their holdings of only equities, bonds, and cash. Recent trends in Europe, including the launch of an active ETF share class structure¹ and the entry of more active fixed income ETFs show ETFs could be on a similar path as mutual funds using multi-asset strategies to mitigate portfolio risk and generate alpha.

Given the market turbulence over the past two years and the viability of the traditional 60/40 asset split, advisors and investors see multi-asset portfolios as increasingly important². A quarter of survey respondents expressed interest in multi-asset ETFs and globally 43% of investors plan to increase allocations to multi-asset actively managed ETFs.

Only a handful of ETF issuers offer these products. So, investor interest coupled with the relatively small product offering provides opportunities for asset managers considering entering this space.

In Europe, retail growth of ETFs has the potential to propel multi-asset ETFs forward. As such multi-asset portfolios are being designed to match specific investor risk profiles and goals, providing a form of embedded advice and discipline (asset class diversification and automatic rebalancing) within portfolios. For advisors, multi-asset ETFs may serve as the core of a portfolio, enabling the addition of satellite positions. Alternatively, multi-asset portfolios can help with ‘householding', providing a scalable solution for smaller family accounts within the same household being managed by an advisor.

Launching Multi-Asset ETFs

Since these strategies already exist within UCITS, U.S. 40 Act and Hong Kong Fund wrappers, managers have another option to explore multi-asset beyond mutual funds within an ETF wrapper. The asset classes issuers can choose to include in their offering are governed by the specific regulatory structure in which they launch. So, holding equities, bonds, derivatives, commodities, and alternative classes such as private equity or real estate are permitted in some, but not all of U.S. 40 Acts, UCITS and Hong Kong Funds.

Issuers have different options to launch a multi-asset ETF including:

• Fund of fund: This structure is the most common approach for launching multi-asset ETFs. Portfolios in this structure constitute other funds and are common within mutual funds and alternative funds. The holdings can be funds within the same umbrella or outside it. The use of these structures within an ETF can provide investors with a broad exposure to multiple strategies, managers, and asset types.

There are some regulatory requirements which should be considered for fund of funds, such as the UCITS requirement to hold no more than 20% of its assets in a single UCITS.

• Master-Feeder: This structure is common within mutual funds, but ETF usage is limited. There are different approaches within this structure to obtain a multi-asset portfolio. These include when a feeder invests in a master holding a multi-asset portfolio, and benefits from the exposure, or the feeder invests in bonds and obtains a multi-asset exposure by investing in an equity holding master. 
• Sub-fund: Another approach is to launch a sub-fund which directly holds multi-asset securities within the portfolio. This approach is commonly seen in hedge funds and alternative funds and as noted above, the assets which can be held are governed by the relevant U.S. 40 Act, UCITS and Hong Kong Fund regulations. Issuers and service providers should ensure that the operational and technical processes are in place to handle the different nuances of the assets held.

Key considerations for managers seeking diversification in an ETF wrapper:

• Whether active or passive, the underlying asset classes of the ETF will be multi-asset. So, expertise in multi-asset, and the evolving regulatory framework, provide managers a starting point for launch in an ETF wrapper.
• Multi-asset managers with a UCITS, a Hong Kong mutual fund or a U.S. 40 Act fund have the option and the infrastructure largely in place to launch a multi-asset ETF.
• Managers with existing multi-asset funds can translate their offering into multi-asset ETFs.
• Multi-asset ETFs can exist alongside an existing mutual fund offering. Managers offering both have more opportunities to distribute their products to a wider group of investors.

What’s Next?

Evolving investor appetite in ETFs and interest in multi-asset exposure reveals significant scope for growth in ETFs. With the increasing focus on diversification of investment portfolios, multi-asset ETFs could become more sought after and managers are taking note.

Actively managed ETFs are set to be a major area of investment with 78% of investors planning increased exposure to actively managed ETFs in the next year. The ability to launch an active multi-asset ETF is an additional area of potential growth and evolution.

If you have any questions or would like further information, please reach out to Eamonn O'Callaghan.