First Sentier has become the latest in a growing list of active fund managers to enter the ETF arena. Their new product, LEVR, is a geared Australian shares strategy that will soon be listed on the ASX.
On the surface, it’s a sign of the times. Demand for ETFs has soared. Investors increasingly prefer the ease, transparency and lower cost of buying funds on the exchange. So it’s not surprising to see active managers trying to ride the wave by repackaging their old strategies into new ETF wrappers.
But there’s a deeper story that doesn’t get talked about enough. The truth is, most active managers who launch ETFs struggle to attract money. Today there are 50 ETF providers on the ASX, but just 11 of them control 97.5% of the assets. And all but three of those are index-focused.
That leaves the remaining 39 active ETF managers sharing just 2.5% of the ETF market between them.
24 ETF managers each manage less than $100 million — barely enough to stay afloat.
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Source: ASX
This tells you something very important. The ETF market is dominated by indexed investing. Active ETFs are struggling to find an audience.
Active underperformance in the spotlight
There’s a good reason for this. The SPIVA scorecard, which tracks the performance of active managers against their benchmarks, has told a consistent story for over a decade. Most active funds underperform over time. In Australia, more than 85% of active Australian equity funds have failed to beat the index over 15 years. Our own research into 349 funds found that 9 out of 10 large-cap Aussie share funds lagged a simple index ETF over the last 5 years.
The odds get worse when you factor in higher fees, tax inefficiencies and the tendency for active funds to hold large cash balances that dilute long-term returns.
Putting these strategies into an ETF structure doesn’t change that. It just makes the underperformance more visible.
Why most active ETFs don’t take off
Fund managers like First Sentier argue that their experience and stock-picking ability will justify the active fees. LEVR will use gearing to amplify exposure to a select group of ASX 100 companies they believe have strong balance sheets and growth potential. There’s a clear pitch to investors looking for higher returns, with the convenience of not having to manage margin calls.
But even with this pitch, the road ahead is tough.
The track record of active ETF launches in Australia isn’t great. Many struggle to reach critical mass. Some get delisted quietly after failing to attract enough interest. Others survive on life support, with minimal assets under management.
LEVR will also face a significant cost hurdle. At 0.95% per year, it’s more expensive than the two existing geared index ETFs already on the ASX — GEAR (offered by Betashares) and GMVW (offered by VanEck). These charge 0.80% and 0.35% respectively. That cost difference will eat into returns over time.
ETFs offer daily pricing and better transparency of holdings. That’s great for investors. But it also removes the fog that used to protect active funds inside traditional managed fund structures. There’s nowhere to hide. Investors can now clearly see what they’re buying, how it’s performing, and whether it’s worth the fees.
In the case of LEVR, four of its top five holdings are the same as those in GEAR, an indexed geared ETF. That raises questions about how much active value investors are really getting for the higher fee.
ETFs aren’t just a structure. They represent a shift in power.
The success of index ETFs is not just about the format. It’s about a bigger shift in the investment world. Power is moving from product manufacturers to investors. People want simple, low-cost, diversified investments that do what they say on the tin. They want transparency. They want control.
Active managers entering the ETF space need to realise that they’re not just launching a new product. They’re entering a new ecosystem. One where performance is ruthlessly measured and price competition is fierce.
That’s why most of the ETF market growth has gone to passive providers like Vanguard, iShares, Betashares, VanEck, State Street and GlobalX. They offer index strategies that do exactly what investors want. Low cost. Clear strategy. No surprises.
What it means for investors
If you’re considering an active ETF like LEVR, ask yourself a few key questions. Does the manager have a strong and consistent track record? Are the fees justified? Is the risk — especially with gearing — something you’re comfortable with? And do you really believe this strategy will do better than a simple indexed approach?
At Stockspot, we’ve always believed in the power of index investing. Our portfolios are built using ETFs that offer broad market exposure at low cost. We think that’s the smartest path for most Australians saving for their future — whether it’s in super, pensions, or outside of super altogether.
Active ETFs may appeal to some investors looking for something different. But before you jump in, it’s worth remembering the data. Most won’t outperform. And in an ETF structure, that underperformance is harder to hide.
So while First Sentier’s new ETF may generate some interest, history suggests that active ETF success will remain the exception, not the rule — especially when it’s charging almost three times as much as some of its index-based geared rivals.
