ETF TV News #84 Margareta Hricova and Deborah Fuhr discuss the trends in Active, ESG, thematic ETFs during the first half of 2021

[00:00:03] Presented by Syntax Advisers.

[00:00:08] Margareta Hricova Welcome to ETV TV – your insight into the world of exchange traded funds, issues and investment.

[00:00:12] I’m Margareta Hricova and joining me today is Deborah Fuhr to discuss some of the highlights from last week and from the first half of 2021. Welcome, Deborah.

[00:00:23] Deborah Fuhr Thank you for having me.

[00:00:24] Margareta Hricova Can you tell us about some of the news highlights in the ETF industry last week?

[00:00:29] Deborah Fuhr Last week was a pretty active week. There were 39 new listings from 28 issuers on 10 exchanges. We saw a lot of new listings across the exchanges in Asia. Canada was active, as was the US. And when we look at the type of products coming to market, it’s carried on with the theme of primarily ESG and thematic exposures.

[00:00:50] Margareta Hricova Can you share with us some of the highlights of the ETFGI’s research from the end of the first half of 2021?

[00:00:56] Deborah Fuhr When we think about ETFs, I think it’s important to remember that ETFs are just regulated funds with the added benefits of being listed and traded on exchanges with that in-kind creation redemption process. In most markets they also provide daily transparency and they are cost efficient with small minimum investment size. We differentiate ETFs from ETPs in that ETFs are regulated funds.

[00:01:22] Products that are not structured as funds, which would be things like notes and partnerships and commodity pools will often cause investors to incur different regulatory and tax treatments. So it is important from an investor point of view, you understand the differences of the structure of the products.

[00:01:41] When we look globally, the ETF industry has reached a new record of 9.35 trillion US dollars invested. There are now nearly 9000 products, 18299 different listings. There are 556 providers of the products and they’re listed on 77 exchanges in 62 different countries.

[00:02:01] The compound annual growth rate has been 18.4% and year-to-date we’ve seen that the growth rate has been 17%. The US accounts for nearly 70% of all the assets, but that doesn’t mean investors are just using them in the US, but rather, these are products that are domiciled there. Europe is next and then Japan. And I think the important thing about Japan, which does differentiate it, is the Bank of Japan has been buying equity ETFs since 2012 and accounts right now for over 60% of all the assets. There has been discussion about the Bank of Japan cutting back on the purchases of ETFs. So it’ll be interesting to watch if they at some point do decide to unwind some of their investments.

[00:02:46] When we look at type of exposure, equity products still account for a third of all the assets globally. Then you have fixed income accounting for about 16%. Active was at one point less than one percent, but now it’s 4.3%. In Canada, where ETFs have always been regulated like funds, active ETFs have traditionally been about 23% of all the assets. So that does vary significantly on a regional basis. I think it’s also important to look on the far side that 97% of the assets are sitting in products that are structured as funds, which is why we do differentiate them.

[00:03:23] Both for the month of June and year-to-date, we’ve seen the majority of money is going into equity focused ETFs and then fixed income by a very significantly lower amount of net inflows. So investors are clearly looking to put risk on. Investing in equities is significantly more than last year and significantly more than fixed income, and the flows into active are significantly higher than what we saw last year at this point and in the past.

[00:03:53] Globally, there’s 5.5 trillion dollars invested in market cap products, the flows year-to-date have been 332 billion, which is higher than 305 for all of last year, so we still see significant inflows there. Smart beta really saw very little interest last year, but we’re seeing an increasing interest again this year, so there’s 1.2 trillion dollars invested there and the flows through the first half of year are at a 101 billion. If you look at all of last year, it was just 53 billion. So you can see that significant increase.

[00:04:27] If we look at thematics, that’s really been an area where we’ve seen significant increase in investor interest. I think for many investors, especially retail, it’s been a place where they have used thematics instead of investing in single securities, because it allows them to have smart portfolio managers. Some of these products are active, some of them are index that identify which companies would be exposed to 3D printing, autonomous cars, genomics and categories, which might be harder for many retail investors to identify which companies they should be investing in. And so you can see that the flows year-to-date have been 51 billion. All of last year it was 104, so we’re not seeing much higher levels than last year, but it still is an area of interest.

[00:05:12] In ESG is clearly an area where we’ve seen a lot of interest and a lot of new launches. So there’s been 82 billion of net inflows and all of last year was 89 billion. It seems almost every asset manager that’s bringing products to market has a flavor of either ESG or it could be a theme that’s focused on ESG. And it’s not just ‘E’ any longer. Sometimes it’s the ‘S,’ and sometimes it’s the ‘G,’ and sometimes it’s the combination, and multiple indices are coming to market so it’s really important that investors do their homework, to understand, ‘what are you actually getting exposure to when you invest in these products?’.

[00:05:50] Leveraged and inverse is not really that popular when we come to the number of products or flows, and we can see that this year’s flows have just been 3.6 billion. All of last year was 89 billion. If we look at currency hedge, there’s been some interest in that area, but significantly less than all of last year.

[00:06:11] Actively managed ETFs year-to-date flows have been 82 billion. All of last year was 91. And we expect to see more of that. I think as the patent for Vanguard share class model goes away at the end of 2021, we’re likely to see that other firms will try to use that model as opposed to converting mutual funds into ETFs, which means you no longer have mutual funds. I think having products in both wrappers would serve the issuers and investors in the best way, because there’s still many areas where mutual funds work and ETFs don’t work as well, such as in 401k or defined contribution products.

[00:06:51] And then the last one is crypto. We’ve seen a lot of interest there. If you look at the net flows, four billion vs 414 million all of last year, so a significant increase there.

[00:07:03] And how big are some of the ETFs? What we’ve seen is, there’s often a ‘first mover advantage’ and as ETFs get bigger, they tend to get bigger and bigger and bigger. So out of that nearly 9000 products, only 632 have, individually, assets over two billion. And if you were to add up the assets in all of those 632 products, it accounts for 7.6 trillion dollars. So about 82% of all the assets sit in just 632 ETFs globally.

[00:07:35] So where are we on fees? The majority of assets are sitting in products that have fees of between 0-10 basis points. There’s over three trillion dollars sitting in that bucket and there’s less than a thousand products that are sitting there. If we were to add in the products with fees of between 10-20 basis points, we’d be adding in another 2.3 trillion dollars, so we’re looking at the majority of the assets in the ETF industry being in lower cost products. We do have products that have fees over 100 basis points, over a percent, but we don’t see a lot of the assets in those products.

[00:08:11] What is true is that the plain vanilla products that have been out there for the longest period of time, and that would typically be market cap products, tend to have lower fees. And that makes sense because as assets go up, earning 10 basis points off of a product that has two billion is very different than earning 10 basis points off of a product that only has five million dollars. So the asset managers are willing to lower fees as assets get bigger.

[00:08:38] Those are some of the highlights that we found in the research at the first half of 2021. It’s been a phenomenal first half to the year. We’ve already seen, if you were to look back the past 12 months, over a trillion dollars invested in net flows into the ETF industry.

[00:08:54] We’re likely to see at the end of the year, the calendar year, over a trillion dollars going into the ETF industry.

[00:09:01] Margareta Hricova Well, thank you for the update, Deborah, and thank you to our sponsors, Syntax Advisors, and to you for watching.

[00:09:08] To watch prior episodes and to see news from the ETF industry, visit ETFTV.NET.

[00:09:21] ETF TV News does not provide investment advice nor recommend products.

Published on July 27, 2021