For many of us in the ETF industry, the last week of January (or thereabouts) can be one of the busiest weeks of the year thanks to the annual Inside ETFs conference.
Big discussions around nontransparent active ETFs, environmental, social and governance (ESG) ETF investing and the future of leveraged and inverse products have certainly made this year’s event—which is the epicenter of the ETF world for four days in South Florida—quite buzzworthy.
It’s fun and exciting to see what’s driving innovation and changing the conversation around ETFs. While there were many topics circulating the halls, from alternatives to fixed income, to portfolio management and emerging markets, here are three big themes that stand out.
The ETF ecosystem could be about to break new ground with the imminent launch of nontransparent actively managed ETFs. These regulator-approved wrappers were certainly the talk of the town in the past week—and for good reason.
While there’s more than one single structure in the works, the overarching gist of this push for portfolio opacity is that periodically disclosed or completely non transparent portfolios would bring to the ETF table big active managers who’ve waited for an opportunity to offer their expertise, proprietary research and “secret sauce” to ETF investors.
That effort could mean a whole new wave of assets will find their way into ETFs. It could also mean job creation in this industry because, at the very least, some formats would require a new role to be added to the creation/redemptions process—the AP representative. And it could ultimately be the new tide that lifts all actively managed boats.
For more than a decade, we’ve been waiting for actively managed ETFs to find their stride. But with the exception of some successes primarily in the fixed income space, active ETFs remain a tiny part of the market, commanding only about 2% of all U.S.-listed ETF assets.
If you are a die-hard believer in the power of a good active manager, this may be music to your ears, as new, well-known asset managers join the fray.
(You can read all about these proposed semitransparent wrappers here and here.)
Rising Tide For ESG Investing
Generally, Brown Brothers Harriman releases its annual Global ETF Survey, in partnership with ETF.com, this time of year.
Among the most interesting findings this year, the survey showed that advisors, institutional investors and fund managers globally are increasingly paying attention to ESG.
At the conference, without question, discussions about what ESG means, how it can be measured, how it impacts performance, and how you go about doing due diligence at the ETF level abounded. Everyone wanted to know how to navigate this space.
The BBH survey showed that the outlook for growth in this segment is “encouraging,” as investors express demand for ESG ETFs.
“In five years, 30% of global ETF investors expect to have between 11% and 20% of their portfolio in ESG ETFs,” the survey said. “ESG ETFs also earned the top ranking among global ETF investors as the strategy they want to see more of in the market.”
So far, the challenge has been the link between demand for ESG strategies and actual dollars finding their way into these funds.
“According to recent ETFGI data, ESG ETFs globally represent $52 billion of the $6 trillion in ETF AUM in 2019,” the survey said. “Yet nearly 74% of global investors say they plan to increase their allocation to ESG ETFs over the next year. And in five years, many survey respondents believe they will have significant allocations to ESG ETFs—19% said between 21-50% of their portfolio will be in ESG ETFs.”
This is a segment of the ETF market that’s clearly in its early innings, with just under 100 ESG ETFs available today commanding only about $20 billion in combined assets. It will be interesting to see what kinds of strategies come to market, and how investors implement these strategies in the future.
(The 2020 Global ETF Survey also offers great insight across active ETF adoption, smart beta and fixed income.)
Leverage/Inverse ETFs Going Mainstream?
The Securities and Exchange Commission is considering changing some things about the way geared ETFs come to market and find their way to end investors.
The proposal would change the exemptive relief requirements for some ETFs that rely on derivatives; namely, leverage and inverse strategies—making it easier to navigate the approval process.
It would also raise the burden of investor protection on brokers and registered advisors, who would have to qualify their clients to offer access to these types of funds.
The commission wants to require those selling these types of strategies “to exercise due diligence in approving a retail customer’s or client’s account to buy or sell shares of certain ‘leveraged/inverse investment vehicles’ before accepting an order from, or placing an order for, the customer or client to engage in these transactions.”
In what’s now open-comment season for this piece of regulation, ProShares Chairman Michael Sapir argued that this “unnecessary” rule would be detrimental to investors.
“If the proposal is adopted, some investors who could benefit from the enhanced return and portfolio protection potential of leverage and inverse funds could be prevented from buying them by an overly burdensome qualification process,” Sapir said in his letter to the SEC. “Brokerage firms could even stop offering these funds altogether due to the difficulty of implementing the regulations.”
Noting that there seems to be no problem to be solved, and therefore this regulation is unnecessary, Sapir added, “The proposal would be at odds with our long-standing system that gives investors and their advisors the freedom to make their own investment decisions.”
There are more than 160 leveraged ETFs and 116 inverse ETFs on the market today, and ProShares is one of the largest providers in this space.
We’ll be watching closely this ongoing regulatory debate as the public comment phase goes through March 24, 2020.
Contact Cinthia Murphy at [email protected]