Another Wild Year For ETFs

January 05, 2022

ETFs had another wild year, blowing past last year’s record of 318 new launches by September, for a total of 477 new ETFs by the end of 2021.

Of those launches, 64%, or 306 ETFs, were actively managed. That’s an increase from last year, when a little more than half of all launches were actively managed. To put that in further perspective, almost as many active ETFs launched in 2021 as all of the ETFs that launched in 2020.

The surge in active management is largely due to the ETF Rule that passed in 2019 and automatically allowed the use of custom baskets by actively managed funds.

That means active funds could now fully leverage the tax advantages of the ETF structure that were already fully enjoyed by index-based ETFs. The change has attracted many newcomers to the ETF space, including advisory firms looking to provide their strategies in an ETF wrapper.

Closures were a different story. Whereas 2020 saw a record-breaking count of 275 funds shuttering, the pace slowed to just 79 fund closures in 2021, a number not seen since 2013. The low level of closures suggests that much of the dead wood in the market was pruned in 2020.

Biggest Launches

The year also saw a handful of new ETFs achieve blockbuster status, breaking the $1 billion mark within their first year of trading (we’re excluding mutual-fund-to-ETF conversions in this case).

The most notable was the BlackRock U.S. Carbon Transition Readiness ETF (LCTU), which ended its first day of trading in early April with $1.25 billion in AUM, making it the most successful ETF launch day ever. The actively managed fund focuses on U.S. companies that are successfully making the transition to a lower-carbon economy.

Much of those assets have come from the California State Teachers’ Retirement System, which has a stake of more than $700 million in the ETF. That’s not surprising, considering the focus of many pension funds on controlling for climate change risk. LCTU ended the year with $1.6 billion in assets under management.

Several months after LCTU’s launch, in the latter half of October, the first bitcoin futures ETF debuted and rocketed to $1 billion within a few trading days of launching. The ProShares Bitcoin Strategy ETF (BITO) only pulled in about $170 million after its first few days of trading and ended the year with $1.2 billion in AUM.

Although both LCTU and BITO drew attention right out of the gate and quickly reached $1 billion or more, two other ETF launches during the year are arguably more successful. The actively managed Vanguard Ultra-Short Bond ETF (VUSB) launched around the same time as LCTU, and while it grew more slowly, it currently has more than $2 billion in AUM.

Even more impressively, Nuveen launched its first nontransparent active ETF in late September, and the fund ended the year with $3.3 billion in AUM. The Nuveen Growth Opportunities ETF (NUGO) is not a clone of an existing Nuveen strategy but a unique product.

Its asset growth can largely be attributed to changing asset allocations within Nuveen’s Lifecycle and Lifestyle target date mutual funds-of-funds as the issuer moves money out of the TIAA-CREF Large-Cap Growth Index Fund and into NUGO. 

If you’re looking at launches by smaller issuers, two stood out in particular for both their timeliness and their accumulated assets.

Newcomer Horizon Kinetics launched the actively managed Horizon Kinetics Inflation Beneficiaries ETF (INFL), which targets stocks that are likely to benefit from inflation, in January 2021. The fund currently has $856.6 million in AUM and has outperformed broad equity benchmarks since its launch. 

The Roundhill Ball Metaverse ETF (META), the first ETF to specifically focus on the metaverse concept, has gathered roughly $915 million in assets since launching at the end of June. 

Asset Class Breakdown
There were some changes to the asset class breakdown of 2021’s launches compared to those from  2020.

U.S. equity dominated in 2020, representing 47% of all launches, but it fell to 37% for 2021. That slack was taken up by asset classes like international equity, which jumped from 23% of all launches in 2020 to 29% last year.

Fixed income also saw some changes, with U.S. fixed income ETFs falling from 14% of launches in 2020 to 10% in 2021, while international fixed income ETFs increased from 3% of launches in 2020 to 5% in 2021. 

Interestingly, while U.S. equity ETF launches fell by a significant percentage, some traditionally less popular asset classes saw increases. Leveraged ETFs saw a significant bounce, from 1% of launches in 2020 to 5% in 2021. Inverse ETFs, however, held steady at 1% of launches for both years.

Due to the launches of three bitcoin futures ETFs, currency funds jumped from 1% of launches in 2020 to 3% in 2021. Asset allocation ETFs rose from 8% of launches  to 10% in 2021. While alternative ETFs fell from 2% of launches to 1%, commodities saw an uptick in ETF launches, from 1% to 2%.

Other Developments In 2021

Beyond the surge in active ETF launches, there were a number of other trends that took place during the year. Perhaps the most interesting was the first mutual-fund-to-ETF conversions. Guinness Atkinson was the first to take this step, when it converted two of its existing mutual funds into ETFs at the end of March.

The SmartETFs Dividend Builder ETF (DIVS) and the SmartETFs Asia Pacific Dividend Builder ETF (ADIV) have roughly $24 million and $4 million in AUM, respectively, but they were quickly followed by the first conversions from Dimensional Fund Advisors, which in their first wave brought about $30 billion in mutual fund assets into the ETF space.

DFA has since converted several more funds, and other firms such as Motley Fool Asset Management and Foothill Capital Management have made similar moves. J.P. Morgan and Franklin Templeton have both announced plans to convert some of their existing mutual funds into ETFs this year.

But there is another planned conversion still waiting to happen. The issuer of the $30 billion Grayscale Bitcoin Trust (GBTC) said during the year that it would convert GBTC into an ETF once physical bitcoin ETFs are given the greenlight by the SEC.

While bitcoin futures ETFs like BITO were allowed to launch in 2021, the SEC has balked at approving physical bitcoin ETFs. Indeed, the question of whether the regulator will finally give the green light to such a fund is perhaps the most compelling carryover from 2021.

Contact Heather Bell at [email protected]

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