By Simon Elliott, head of investment trusts, JP Morgan Asset Management
The investment trust sector has rarely faced a more competitive backdrop. Over the past year, boards have navigated a wave of corporate activity – takeover bids, mergers, managed wind-downs, and strategic reviews – against a backdrop of persistent discounts and shifting investor sentiment. Yet one development has drawn particular attention: the decision by the Board of Middlefield Canadian Income to convert their investment company into an active exchange traded fund (ETF).
This is the first time a UK-listed investment company has made such as move, but few expect it to be the last. With active ETFs gaining traction globally, some are now speculating that the rise in active ETFs presents an existential threat to the future of the industry.
The rise of ETFs
ETFs have transformed how investors access markets, offering scalability, cost efficiency and daily liquidity making them a cornerstone of modern portfolio construction. In 2014, global ETF assets stood at approximately $2trn. By the end of July 2025, this figure had soared to $16trn, growing at roughly 20% annually.
While most assets remain in passive vehicles tracking broad indices at minimal cost, the last decade has seen a surge in actively managed ETFs, which combine the transparency, tradability and low fees of ETFs with the potential for active outperformance.
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In 2014, active ETFs accounted for a fraction of the market, but by mid-2025 they accounted for around $1.4trn, regrowing at 46% annually. Today, 38% of ETFs are active, making this the fastest-growing segment of the ETF universe.
For fund selectors, the appeal is clear: they provide daily transparency, intraday liquidity, and typically lower fees than traditional active funds. Institutional allocators are increasingly using them as flexible building blocks within multi-asset portfolios, while wealth managers see them as an efficient way to add tactical or thematic exposure.
The investment trust model
Investment trusts remain one of the most flexible and proven vehicles for long-term investing. Their closed-ended structure allows managers to take a long-term view, invest in less liquid assets, and avoid forced selling that can plague open-ended funds in periods of volatility. The ability to employ gearing (leverage) to enhance returns adds another level for outperformance. Many trusts also continue to stand out for their dividend consistency, with the AIC’s “Dividend Heroes” list now featuring 20 trusts that have increased their dividends consistently for 20 consecutive years or more.
But perhaps the greatest differentiator is governance. Investment company boards, composed of independent non-executive directors, have become increasingly assertive in protecting shareholder interests. Many have pushed for fee reductions, buybacks, and even manager changes to improve performance or narrow discounts. That accountability is unique among fund structures.
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Yet challenges persist. Discounts to net asset value (NAV) undermine investor confidence. Fees also remain under scrutiny. According to the AIC, the average ongoing charge for trusts (excluding VCTs) sits around 1%, substantially higher than most ETFs. However, this reflects the sector’s diversity: over 40% of trusts universe provide exposure to alternatives, which carry higher costs and are impossible to replicate in an ETF structure.
For more comparable long-only equity strategies, the gap is narrowing. Many boards have introduced tiered fee structures or capped OCFs, and a growing number of trusts now operate at sub-50bps levels, bringing them closer to active ETF pricing. The direction of travel is clear: investment companies are adapting, but the pace of change will determine whether they remain competitive.
Existential threat or evolutionary pressure?
While it’s easy to frame active ETFs as a direct threat, the reality is more nuanced. ETFs bring undeniable advantages, but they cannot replicate some of the defining features of the trust model: the ability to invest in illiquid assets, apply leverage, and deliver dividend smoothing.
The question is whether trusts are using their structural advantages to full effect. According to the AIC average gearing across the sector is around 9%, yet more than 40% of equity-focused trusts use no leverage at all. Similarly, according to Winterflood Securities, around 60 investment companies pay no yield, and many portfolios remain concentrated in highly liquid equities: exposures that could arguably be delivered more efficiently through an ETF.
In other words, if a trust isn’t using gearing, offering dependable income, or investing in assets inaccessible to open-ended or ETF structures, investors are right to question its purpose. Active ETFs may not replace trusts, but they are forcing boards to be clearer about their value proposition.
Constructive pressure
Rather than an existential threat, active ETFs represent evolutionary pressure and a powerful catalyst for the sector to modernise. A handful of trusts may follow Middlefield’s lead and explore conversion, particularly where strategies are scalable and highly liquid. But for most boards and managers, the task is to reaffirm the unique advantages of the closed-ended model: long-term capital, active governance, and access to assets others can’t reach.
Far from signalling decline, the emergence of active ETFs could mark the next stage of healthy competition in fund management. They’re raising the bar on transparency, pricing and responsiveness. For investors, that’s no bad thing. And for investment trusts, it’s a timely reminder that the right structure still needs the right strategy behind it.