Mr. Durdevic, active ETFs are currently experiencing a real boom. Are we seeing a reordering of asset management, or is this mainly clever marketing?

It is probably a bit of both. But first we need to remind ourselves what an ETF actually is. An ETF is first and foremost an investment vehicle, a wrapper for an investment strategy. The term exchange-traded fund says nothing about index replication or passive investing.

What matters instead are the characteristics of this vehicle: transparency, liquidity, cost efficiency and flexibility. These advantages have made a major contribution to the success of ETFs.

So active ETFs are not a fundamental reinvention?

No. They are the next logical step in the evolution of the ETF market. Originally, ETFs were used mainly for passive index strategies. Today, active investment strategies can be implemented in them as well.

For example, we have transferred our research-enhanced index strategies, which we have managed for decades, into ETFs. The strategy for US equities has existed with us since 1987. What is new is therefore not the investment strategy, but the vehicle in which we offer it.

Will the distinction between active and passive investing lose importance in the future?

I am convinced that both approaches will continue to have their place. There are market segments in which investors want to replicate an index as cost-effectively as possible. In other areas, active management can add value.

Ivan Durdevic expects global assets under management in active ETFs to rise to around $6 trillion by 2030. (Image: provided)

Our research-enhanced index strategies, for example, are often used as an alternative to passive core allocations. The aim is to generate additional returns versus the benchmark over a longer investment horizon.

J.P. Morgan Asset Management is one of the leading providers of active ETFs. What do you do better than your competitors?

We focus on what we do especially well: active management. J.P. Morgan Asset Management manages around $4.8 trillion in client assets. Of that, 99 percent is managed actively.

"Active is not the same as active. First you have to understand what objective a strategy is pursuing."

Active management is part of our DNA. When we expanded our ETF business in Europe in 2018, our ambition was to offer our much-awarded active investment expertise in an ETF wrapper.

Critics argue that active funds often do not outperform passive products over longer periods. What is your response?

Active is not the same as active. First you have to understand what objective a strategy is pursuing.

For example, we distinguish between three categories: index-like active strategies, so-called higher-alpha strategies with a higher targeted excess return, and outcome-oriented strategies, where the focus is on generating regular income, so-called "income".

In the latter case, the goal is not even to beat a benchmark. 

But with index-like strategies in particular, the question arises of whether active management is worthwhile at all.

The quality of the investment process and the manager's track record are what matter.

We have managed our global research-enhanced index strategy for professional investors since 2003. Over that time, according to our calculations, it recorded a negative excess return versus the benchmark in only three calendar years.

Even in rolling five-year periods, which we review quarterly, there has been no negative observation period in the past.

Of course, past performance is no guarantee of future returns. But it does show how important a proven investment process is.

The boom is attracting more and more providers. Do you expect a market shakeout?

Investors need to look closely. Just because a product is labeled an active ETF does not mean it offers a convincing investment strategy. It is therefore an advantage to be able to show a track record spanning several years.

"We are only at the beginning of a major development."

You have to understand the manager, the investment process and the track record. Incidentally, that also applies to passive ETFs. Not every index is constructed equally well.

How large can the market for active ETFs still become?

We are only at the beginning of a major development. This year, around 30 percent of global ETF net inflows are already going into active products. In Europe, that share is still only about 9 percent.

We expect assets under management in active ETFs worldwide to rise from around $2.5 trillion today to about $6 trillion by 2030.

For Europe, we expect growth over the same period from a little more than $100 billion to around $400 billion.

That would be enormous growth momentum. Where do you see the greatest potential?

Particularly in fixed income. In Europe, around 80 percent of fixed-income investments are actively managed. There are good reasons for that.

A traditional bond index is usually weighted by outstanding debt volume. The more debt an issuer takes on, the higher its weighting in the index.

That does not necessarily sound like an optimal investment strategy.

Exactly. A high level of debt is not automatically a mark of quality. With bonds, credit analysis is crucial. Investors must assess whether an issuer can actually meet its obligations.

"In addition to active bond ETFs, we see great potential in outcome-oriented strategies."

There is also monetary policy. When central banks change their policy rates, portfolios have to be positioned accordingly. Active management can make a significant contribution here.

Which other developments do you find particularly interesting?

Alongside active bond ETFs, we see great potential in outcome-oriented strategies, especially products designed to generate regular income.

We launched our equity premium income strategies in the US in 2020. Globally, we now manage more than $100 billion in this category. In Europe, the figure is already around $7.5 billion.

What makes these products so attractive?

Their goal is not to beat the market, but to enable regular distributions. Our corresponding strategies target annual distributions of 7 to 11 percent, paid monthly.

That appeals to investors who want to draw ongoing income from their portfolio.

However, such distributions come at a price.

That is correct, because these ETFs combine an actively managed equity ETF with a covered-call strategy. In doing so, investors give up part of the possible price upside.

In a sharply rising equity market, such strategies will therefore tend to lag behind the benchmark. In sideways or falling markets, however, the options premiums collected can provide an advantage.

What matters is that investors understand the objective they are pursuing with such a product.

You have also brought so-called buffer ETFs to Europe. What function do these serve?

These products provide defined protection against certain price losses. We have launched corresponding solutions for the Nasdaq and the S&P 500.

Especially after strong price gains, investors are interested in ways to remain invested in the equity market while also cushioning part of the downside risk.

Depending on the product, protection mechanisms against price losses are provided within certain ranges. The precise structure is crucial.

Switzerland was among the first European markets where J.P. Morgan offered active ETFs. Are Swiss investors more innovative than their European peers?

For us, Switzerland is one of our core markets. In 2018, I was initially responsible myself for Swiss ETF distribution.

From my experience, I can say that Switzerland was one of the first markets where active ETFs were truly understood and used.

Why Switzerland in particular?

Swiss wealth managers and institutional investors are extremely professional. They analyze investment strategies very carefully and want to understand where any excess return comes from.

They recognized early on that the advantages of an ETF can be combined with a proven active investment process.

"Fixed-income investments, in particular, are regaining importance as a tool for portfolio diversification."

In US equities, for example, there is also the fact that the advantages of an Irish fund domicile for withholding tax can be combined with active management.

Which active ETF strategies are especially in demand among Swiss investors?

So far, a large part of our business in Switzerland has come from research-enhanced index strategies in equities.

But we are now also seeing rising demand for income-oriented solutions and active bond ETFs.

Fixed-income investments, in particular, are regaining importance as a tool for portfolio diversification. In Swiss francs, the return potential is admittedly less attractive than in dollars or euros, but interest is nevertheless increasing.

What role does artificial intelligence play in the development and management of ETFs?

As a group, J.P. Morgan invests more than $20 billion in technology every year. We see artificial intelligence as a complement to our existing capabilities.

It helps portfolio managers and research analysts make better decisions. But we still need people to monitor and train the systems and ultimately take responsibility for the decisions.

So AI will not replace active fund management?

I do not think so. Technology can make processes more efficient and improve analysis. But human judgment remains crucial.

The same applies to client relationships. Otherwise, eventually only one AI agent will be communicating with another.

How will the ETF landscape change by 2030?

We expect the overall ETF market to continue growing strongly. The active ETF segment is likely to develop particularly dynamically, even if you look only at newly launched products.

Investors will increasingly use active strategies as a fixed component of their asset allocation. That applies to equities, bonds and outcome-oriented solutions.

What does that mean specifically for Switzerland?

We expect active ETFs to become even more widespread. We see additional potential especially in income-oriented strategies and in fixed income.

Our long-term capital market assumptions for global equities over the next ten to fifteen years point to an annual return of 6.6 percent in Swiss francs.

For our research-enhanced index strategies, we additionally target excess returns of 0.6 to 0.75 percentage points.

At first glance, that does not sound like very much.

But over a long investment horizon, such additional return makes a significant difference. That is exactly what many professional investors in Switzerland recognized early on.

From our perspective, the active ETF is therefore not a passing fad, but a lasting evolution of asset management.

Ivan Durdevic is Co-Head of EMEA ETF Distribution at J.P. Morgan Asset Management.