The majority (82 per cent) of institutional investors, including UK pension funds, think that exchange-traded funds (ETFs) are moving away from short-term asset allocation strategies to core portfolio holdings, research from Carne Group has revealed.

The research revealed that ETFs are expected to increase market share dramatically over the next three years, with almost two-thirds of investors suggesting that active ETF assets will grow from around 2 per cent market share of total ETF assets in Europe today to between 6-9 per cent before the end of the decade.

Investors are also using active ETFs to access new asset classes, as one-quarter of respondents said they invested in crypto for the first time following innovation in the ETF market, while more than half (56 per cent) said they increased their allocation to the asset class.

In addition to this, 13 per cent of institutional investors said that they are likely to increase allocations to esoteric asset classes via the ETF market.

However, the study shows some concern from investors that some ETFs are not living up to their active labels. For example, the rise of ‘shy active’ ETFs that follow a benchmark-aware approach, meaning they deviate less from the benchmark index than traditional active mutual funds, offering lower active share and tracking error.

Indeed, Carne found that 88 per cent of the investors surveyed thought that managers operating such shy active funds are misleading the market.

Carne Group managing director of business development, Patrick O'Brien, said that “Active ETFs will provide the momentum for the next stage of the ETF growth story to take flight.

"Unlocking the opportunity in this highly competitive space requires careful consideration and speed of execution, which is why we are seeing managers increasingly partner with third parties.

“At Carne, we work with managers who want to establish their own ETF fund, as well as providing the management company underpinning many leading European ETF white label platforms.

"We share concerns about the risk of ‘shy active’ ETFs which can be problematic for investors because they often operate under the guise of active management while closely hugging a benchmark index. Fund managers need to be sure they are transparent about the strategies they offer.”

This article originally appeared on our sister title, European Pensions.

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