What’s Next For ETFs?

December 21, 2021

As the year comes to a close, ETF.com talked to several industry experts to discuss what the next year could bring regarding ETFs. While most agreed that the fast pace of launches and asset growth would continue, topics like ESG were more divisive. We also asked them what they saw as the main ETF themes of 2021. Quotes have been edited for brevity and clarity.

 

Simon Goulet (Blue Tractor): No doubt ESG will continue to gobble up share of mind and investment dollars. I think active is going to continue to grow. People want a dose of active in their portfolios, and I think managers that can generate alpha are going to be rewarded for that with AUM.

You’re going to see innovation in the semitransparent space. People aren’t sitting still with this wrapper structure. Some of the wrapper structures that came out promised they’d be just like an active, managed ETF. They’d be just as tax efficient, and that’s not the case.

 

Yasmin Dahya Bilger (Engine No. 1): More ESG is one thing I can say with confidence. A lot of people focus on the investment components of the ETF market. Is it a market cap strategy? Is it active? Is it thematic? I think the question we’re spending time on is a whole different dimension of understanding the ETF ecosystem, which is proxy voting and engagement of assets.

The ETF industry, in some sense, has been one of the great creators of this topic, with ETFs being now over $7 trillion, and the top three largest ETFs alone at over $1 trillion [in combined assets].

I think this concept of how those assets in this industry with rapid growth, particularly in passive, are being used around voting and around engagement and how that aligns to what end investors ultimately believe and want is going to become more and more part of the storyline in investment management broadly, but with ETFs in particular. So, not just letting the investment part of due diligence dominate the conversation, but also the idea of stewardship.
 

Andrew Chanin (Procure ETFs): Regardless of what the market does, we’re seeing so many more strategies and potential issuers that want to be out there. I don’t see that slowing down—whether it’s an ETF entrepreneur that wants to get into the ETF business or a large asset manager saying, “we don’t have a presence, this is something that’s going to harm us.”

We’ve seen a lot of big players, especially if they’re a financial advisor, avoiding it because they don’t want to have a conflict where they’re putting their clients in these funds. I think they’re all coming to terms with it not necessarily [being] a bad thing.

There’s plenty of room for this industry to grow. I wouldn’t be shocked if this was another year where we see ETFs start closing the gap on mutual funds as far as total assets under management.
 

Nate Geraci (The ETF Store): I think an interesting space to watch is ESG. Despite all the attention ESG continues to get within the media, those products only hold 1.5% of total ETF assets. I think the jury is still out on whether ESG ETFs are something investors really want.

I don’t view direct indexing as an ETF killer overall, but I think it could be very problematic for ESG ETFs. If you have hardcore ESG investors who want to tailor a portfolio around whatever their ESG views are, direct indexing is very effective at that and ESG ETFs are not. It wouldn’t surprise me to see an uptick in ESG ETF closures.
 

Ben Johnson (Morningstar): We’re going to see a continuation of a trend that’s been in place for a long period of time, the majority of each dollar flowing into ETFs is going to go into the broadest, lowest-cost, most tax-efficient ETFs available.

I think we’re going to continue to see the majority of new launches be some form or another of active, including everything from a full-on discretionary stock picking and bond portfolio construction to ESG-intentional index funds.
 

Herb Blank (ValuEngine Inc.): I think there’s a fair amount of fear out there, so we’ll continue to see some income-oriented products, lower beta, more conservative products.
One thing I think will be a boon for ETFs is the ability to have fractional shares. Once you’re able to buy and sell fractional shares of ETFs, that’s the last argument against them being the standard rather than traditional funds in 401(k)s, IRAs, 403b’s and such.

 

Contact Jessica Ferringer at [email protected] or follow her on Twitter

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