Trends Driving ETF Product Development

November 21, 2018

Trend 3: Bring Your Own Assets
One of the most interesting trends in product launches in 2018 is the new wave of what Bloomberg’s Eric Balchunas has labeled “bring your own assets.” These are ETFs that come to market and very quickly grow thanks to client assets coming from the issuer itself.

Showing the market how this is done better than anyone else this year was J.P. Morgan. The firm launched a family of funds known as BetaBuilders, strategies meant to be core beta portfolio holdings for a cheap price.

These BetaBuilder ETFs, only a few months old now, are in some cases already multibillion-dollar funds thanks in great part to J.P. Morgan client assets that, prior to these ETFs, sat in competing funds from issuers like iShares.

Among these blockbuster launches are funds like the JPMorgan BetaBuilders Japan ETF (BBJP), costing only 0.19% in expense ratio, and already boasting $2.5 billion in total assets only five months after inception.

The JPMorgan BetaBuilders Canada ETF (BBCA) is a $2.2 billion fund that’s barely three months old, and the JPMorgan BetaBuilders Europe ETF (BBEU) already has $1.3 billion in assets. These are just some of the firm’s BetaBuilder lineup.

“What J.P. Morgan did this year is put in-housing on the map,” Balchunas said. “J.P. Morgan has four (launches) in the top 10. Talk about rookie of the year.” (See Figure 3.)

 

 

The relevance of this somewhat-novel—and still nascent—trend in the ETF space is that it could, over time, challenge the well-established world order of the who’s-who in this industry.

As Balchunas so aptly put it: “One of the only things that could possibly slow down BlackRock and Vanguard in their rise to world domination is more, big in-housing moves”; in other words, big asset management firms launching their own versions of “cheap core Acme brand” ETFs and investing their own clients’ money into them.

Wannabe Trends
On a side note, two areas of the market that started out with all the hallmarks of being hot trends this year just didn’t quite deliver. 

The first and most obvious one is cryptocurrency ETFs. We talked plenty about them in 2018. But after rounds of filings, public comments, regulator concerns and refusals, and more public comments, it looks like 2018 won’t be the year the market welcomes its first bitcoin ETF—at least as of the time of this writing—though there were several launches targeting the blockchain technology underlying cryptocurrencies.

The second “would-be trend that wasn’t” is ESG investing. There were 11 ESG ETF launches in 2018, many of them presenting unique angles on the space. As Laura Morrison, global head of listings at Cboe Global Markets, put it, we “thought there would be more.” 

It hasn’t been for lack of ink spilled on what environmental/social/governance-based investing is, or its benefits beyond feel-good investing. It also isn’t due to lack of ETF offerings, even though the space is still growing. 

But as a segment, ESG ETFs have yet to take off. It could be that investors and advisors still suffer from fear of missing out when it comes to ESG investing. Some view ESG screens as gatekeepers that may omit from a portfolio some securities that would deliver solid returns.

That type of concern, coupled with the fact that there’s no single recipe for ESG investing—each strategy evaluates ESG metrics differently—contributes to slow adoption. That said, new ETFs such as the iShares ESG U.S. Aggregate Bond ETF (EAGG), launched in October, aren’t all off to a slow start. EAGG already has nearly $55 million in assets.

ESG ETFs may not be prime time yet, but they aren’t going anywhere. Chances are they’ll make their mark as the “top ETF trend of the year” soon enough.

 

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