Key Trends Driving ETF Asset Growth

February 05, 2020

Fixed income ETFs have “come of age” in the past year. ETF investors are clamoring for more product development in the environmental, social and governance (ESG) space. And actively managed ETFs are finally on everyone’s radar.

These are some of the key findings of the 2020 Global ETF Investor Survey, an annual assessment of the industry globally from Brown Brothers Harriman in partnership with ETF.com. The survey, which gathers input from institutional investors, financial advisors and fund managers globally, offers a glimpse into what’s driving growth in the ETF industry.

ETF Market Reaching New Heights

The numbers are impressive. In 2019, ETF assets hit $6.3 trillion globally, growing 32% year on year. And more investors than ever—seven out of 10 investors surveyed—said they will continue to increase their allocation to ETFs in the coming year.

Not surprisingly, however, that enthusiasm over the ETF wrapper isn’t without caution. For instance, most investors continue to look for a minimum asset under management (AUM) threshold before buying in. ETF closure risk is much higher for funds with little to no assets. According to the survey, only 12% of investors would jump into a new fund with less than $25 million in AUM.

Investors also continue to point to liquidity of underlying holdings, and “too wide and uncertain” spreads as trading-related concerns that also pose head winds for wider ETF adoption in general.

Fixed Income ETFs Shine

That said, among the most in-demand strategies are fixed income ETFs, which in the U.S. gathered more assets than equity ETFs in 2019 for the very first time.

Driving that demand are prospects of heightened volatility globally. The U.S. bull market is running long in the tooth, global growth concerns linger and geopolitical risks abound. For two years now, in this uncertain environment, investors ranked fixed income ETFs as their go-to product to manage increased market volatility. At the top of that list is U.S. Treasury funds.

Demand For ESG ETFs Grows, Adoption Remains Slow

Another area of growing investor interest is ESG investing. Roughly three-quarters of global investors surveyed said increasing ESG ETF allocation is on their to-do list this year. What’s more, over the next five years, two out of 10 investors said they may have as much as 50% of their portfolios in ESG strategies. This is a huge growth area for the ETF market.

But so far, ESG investing is more promise than reality. In the U.S., this segment commands only about $20 billion in total AUM spread across 99 ETFs. It’s tiny. Globally, total ESG ETF assets are only $56 billion. As the report points out, ESG has “captured the attention of the financial industry,” but it has yet to actually attract assets.

This May Be Active ETFs’ Big Breakout Year

Finally, the survey painted a very optimistic picture for the future of actively managed ETFs. Thanks in part to the Securities and Exchange Commission’s approval of a nontransparent active ETF wrapper (that has yet to be launched in the U.S.), as well as demand for low volatility strategies, U.S. investors said they are more interested than ever in active ETFs.

The nontransparent active structures, in particular, could make it more appealing for active managers who have worried about revealing their “secret sauce” to launch more traditional actively managed ETFs.

About 62% of U.S. investors surveyed said they plan to increase their adoption of active ETFs this year. Among the most-sought strategies, global equity active ETFs, fixed income and multi-asset portfolio rank highest.

That trend is exclusive to the U.S., however. More European investors than before said they plan to “stay the same” or decrease their usage of active funds this year. That could be linked to the higher importance they place on daily portfolio transparency, according to the survey.

In all, the survey found that ETFs continue to find new traction across the globe, and amid expectations of heightened market uncertainty this year, asset and implementation growth, particularly across fixed income and alpha-seeking active ETFs, could make 2020 another banner year for the ETF industry.

Contact Cinthia Murphy at [email protected]

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