Global future trends in the ETF world

Key points:

• Active ETFs tipped to be fastest-growing product over next two to three years
• Increased demand expected for thematic ETFs – including in areas such as socially responsible investing

Seven in 10 ETF providers think global ETF AUM will reach at least $15trn by 2027 according to a recent report by PwC¹ .

The report found that rather than traditional equity or fixed income products, “forward-thinking managers” are looking to innovate and diversify into areas such as active, thematic and ESG ETFs.

All three of these areas have seen great momentum in recent years which tells us that this is what today’s investor is looking for. But why?

Active ETFs gaining traction

Respondents of ETFs 2027: A world of new possibilities, which surveyed executives from around the world including ETF managers and sponsors, said they expect significant demand from investors for actively managed ETFs over the coming two to three years.

In Europe, this is only just beginning. But we can see what the picture could look like by looking at the US, where net inflows into active ETFs were $102bn last year; a huge difference compared to active mutual funds, which experienced net outflows of around $1.5trn.

Favourable regulation conditions for ETFs is creating considerable growth potential for active ETFs worldwide while lower management fees vs actively managed mutual funds for an offering that is still looked after by a portfolio manager will no doubt look attractive to investors.

Active management mobilises intellectual capital, which can translate into higher costs than index management. However, the ETF vehicle reduces certain costs.

It does not require a transfer agent; settlement is automated and friction costs are reduced thanks to high liquidity, which also makes it possible to invest immediately.

This natural cost efficiency is one of the reasons why active ETFs are currently growing and demand does not appear to be letting up anytime soon.

Thematics in top rankings for anticipated demand

While net inflows to thematic ETFs in 2022 fell compared to 2021, “thematics” is still very much another buzzword in the ETF world at the moment.

According to Morningstar, the segment saw €2.3bn of inflows over the 12 months to March 2023, showing that demand has still been strong even in the challenging market environment.

The investment research house says that despite recent struggles, thematic investing is here to stay² .

Muted net outflows, a strong pipeline of new fund launches, and limited closures hint that the market for thematic funds isn’t going anywhere.

The rising demand is a result of a growing irrelevance of traditional geographic and sector frameworks and an interest in global trends and stories.

Meanwhile, another recently produced report³ predicts a stronger demand for thematic ETFs as “asset allocators increasingly look for funds that tell a story and connect with contemporary themes such as socially responsible investing”.

Europe continues to lead growth in ESG ETFs and they now make up more than 21% of ETF AUM in the region. This expansion is set to continue – with 68% of European respondents expecting more than half of their product launches to be ESG-focused over the next two to three years.

Unsurprisingly, the industry has also seen many active fund managers, and especially those with strong responsible investing credentials, like us at AXA IM, to convert or clone their existing mutual fund strategies into ETF offerings.

That is because ETFs are more quantitative and diversified, with a hundred lines compared to fifty for existing pure judgemental mutual funds and meet strong liquidity requirements.

The market has seen significant growth over the past two decades with the bulk of that growth being captured by larger fund providers that have been able to leverage scale in a market dominated by passive, low-cost, plain vanilla products.

But if timed correctly, new providers have the benefit of having observed that growth, assessing how investor attitudes have changed during that time and then striking while the iron is hot.

With smaller, innovative and focused players now in the game, there are more products designed to meet the more attune and socially responsible mindset of the investor of today.