Building on the major success of ETFs in 2019, there will be anticipation in the air when 2020 finally rolls around. Can the dream story of the exchange-traded-fund continue? Beverley Chandler, Managing Editor, Global Fund Media explores.
ETFs have ended 2019 on an all-time high with the early December news that total assets in ETFs hit a new record of USD6 trillion globally by the end of October, doubling in size in less than four years, according to ETF data provider ETFGI.
The global ETF industry has 6,919 ETFs with 14,326 listings and assets worth USD6 trillion from 400 providers on 68 exchanges in 57 countries as of October 2019, according to the firm. Just where did this ETF boom begin?
The beginnings
The extraordinary growth of ETFs, effectively an investment wrapper that turns an index or a pool of shares into a vehicle that trades like a stock or a share, is relatively new.
The first ETF was the S&P 500 SPDR which launched in January 1993, and now has over USD280 billion in assets at the beginning of December, and mirrors the S&P 500.
The second largest is the iShares Core S&P 500 ETF, which launched in May 2000. These two ETFs are traditional, vanilla ETFs. Based on huge stock market indices to which most investment portfolios will have some sort of exposure, they attract investors of all sorts in all places.
The simplicity of the structure of the ETF gives it transparency, liquidity and low fees, compared with other routes to achieving index exposure.
And a lot of that huge growth in assets over the 26 years has, in recent years, come from the lengthy bull run in equities in the US, which still dominates the ETF industry.
Product development ETF style
But ETFs have evolved over their lifespan and the last few years have seen the rise of other types of ETFs, more nuanced and less focused on big stock market indices.
These are the thematic ETFs, focused on investment themes such as robotics & AI, the arrival of 5g technology, or commodities such as gold.
The rising gold price over the last couple of years has seen record assets flowing into gold ETFs, both those directly invested in gold, and those invested in gold miners and gold mining stocks.
Interviewed in Wealth Adviser, the World Gold Council’s director of investment research Juan Carlos Antigas reported that October 2019 saw European-listed ETFs funds leading gold ETF flows, adding 31.3 tonnes (USD1.2 billion, 1.9 per cent of AUM), or 70 per cent of net inflows, while North American funds added 13.2 tonnes (USD585 million, 0.8 per cent) and Asian funds listed in Asia decreased by 0.8 tonnes (USD0.9 million, 0.02 per cent).
A recent study from Greenwich Associates, commissioned by IndexIQ, found that liquid alternative portfolios held through ETFs will, in the US, see their assets more than double in the next 12 months, as institutional investors push into the sector.
The result of the demand for gold in ETF form saw a couple of days over 2019 when gold ETPs listed on London Stock Exchange traded more than any other equities.
And in terms of gold ETFs not physically backed by gold, Danny Dolan of China Post Global reported that his Gold BUGS ETF saw double the performance of the physical gold price in the last 12 months, through investing in gold mines and gold producers.
Mega-trends: ESG, active management and geography
ESG has become a predominant trend for all investments the world over and ETFs are not isolated from that phenomenon. ETFGI reported that the third quarter of 2019 saw ETFs and ETPs invested in ESG globally gathering net inflows of USD2.80 billion during September, while total assets invested in ESG ETFs and ETPs increased by 7.81 per cent from USD43.90 billion at the end of August to a record USD47.33 billion, with Europe dominating with the most ESG classified products available, followed by the US and the Asia Pacific region excluding Japan.
Active ETFs have also seen enormous growth. The term encompasses ETFs based on active investment management which can mean anything from an actively managed portfolio all the way up to liquid alternatives which includes hedge funds, private equity and real estate.
A recent study from Greenwich Associates, commissioned by IndexIQ, found that liquid alternative portfolios held through ETFs will, in the US, see their assets more than double in the next 12 months, as institutional investors push into the sector.
There is another trend experienced by the ETF industry as it grows geographically. The US ETF industry was traditionally dominated by retail investors, holding ETFs through their private portfolios, advised by their RIAs.
In Europe, the reverse was true, with ETFs adopted by institutions who recognised their advantages of liquidity, transparency, ease of trading and low fees.
Slowly, probably too slowly for many ETF providers, those positions are changing, with the institutional market growing in the US and the retail market growing in Europe. There have had to be regulatory and tax changes made to set that evolution in motion.
Major legislative change
September 2019 saw the most significant regulatory change in the US - the SEC passing the ETF Rule, 6c-11, which modernises the ETF industry ‘by establishing a clear and consistent framework for the vast majority of ETFs operating today’, to quote SEC Chairman Jay Clayton.
“As the ETF industry continues to grow in size and importance, particularly to Main Street investors, it is important to have a consistent, transparent, and efficient regulatory framework that eliminates regulatory hurdles while maintaining appropriate investor protections,” he said.
The simplicity of the structure of the ETF gives it transparency, liquidity and low fees, compared with other routes to achieving index exposure.
The effect of the rule change is likely to be a speeding up of the process of launching an ETF, and a more level playing field for those who go through that process.
And regulatory change also lies behind a new type of ETF launch we will see over 2020 - the semi-transparent or even shielded ETF, which will wrap around a portfolio that the manager wants to keep hidden.
2020 is set to see another exciting year in ETFs, with new products, more products and some consolidation of existing products within the ever-evolving ETF sector. Join us at Inside ETFs 2020 to explore the latest developments in the industry and stay ahead of the curve.