The future of exchange-traded funds: trends and predictions
The Future of Exchange-Traded Funds: Trends and Predictions
Exchange-traded funds (ETFs) have become increasingly popular among investors in recent years. According to the Investment Company Institute, ETF assets rose to $4.7 trillion in 2020, up from $2.4 trillion in 2015. This growth can be attributed to the low fees, diversification, and flexibility that ETFs offer compared to traditional mutual funds. As the ETF industry continues to evolve, let's take a look at some of the trends and predictions for the future of ETFs.
Trend 1: Active Management ETFs
Traditionally, ETFs have been passive investment vehicles that track a specific index. However, there has been a recent rise in actively managed ETFs, which are managed by professional portfolio managers who aim to outperform the market. These funds have higher expense ratios than passive ETFs but offer potential for higher returns.
- According to Morningstar, there were 327 actively managed ETFs in the US market as of December 2020, up from 183 in 2015.
- We can expect to see continued growth in actively managed ETFs as more portfolio managers launch new products.
Trend 2: ESG ETFs
Environmental, social, and governance (ESG) investing has grown in popularity, and ETFs are following suit. ESG ETFs invest in companies that meet certain sustainability criteria, such as reducing carbon emissions or promoting diversity. This trend has been driven by investors who want to align their investments with their values.
- According to Bloomberg, ESG ETFs brought in $97 billion of net inflows in 2020, up from $11 billion in 2019.
- As more investors prioritize sustainability, we can expect to see continued growth in ESG ETFs.
Trend 3: Thematic ETFs
Thematic ETFs invest in companies that are expected to benefit from a specific trend or theme, such as 5G technology or video gaming. These funds allow investors to target specific areas of the market and can provide diversification within a particular theme.
- According to BlackRock, global thematic ETF assets grew to $191 billion in 2020, up from $90 billion in 2018.
- We can expect to see continued growth in thematic ETFs as more investors seek targeted exposure to specific themes.
Prediction 1: Continued Fee Compression
The trend of fee compression, where investment products become cheaper, has been ongoing in the ETF industry. This is due to increased competition among ETF providers and the growing popularity of passive ETFs. As fees continue to decline, investors will benefit from lower costs and higher returns.
Prediction 2: Expansion in Emerging Markets
The ETF industry has already seen significant growth in developed markets, but there is still room for expansion in emerging markets. As more investors seek exposure to emerging market economies, we can expect to see more ETFs targeting these areas.
Prediction 3: Innovation in Structure
ETFs have traditionally been structured as open-end funds, but there is room for innovation in structure. For example, ETFs could be structured as closed-end funds, which can trade at a discount or premium to their net asset value. We may also see the rise of actively managed ETFs with non-transparent structures, which would allow portfolio managers to keep their strategies confidential.
Conclusion
The ETF industry has come a long way since its inception in 1993. As the industry continues to evolve, we can expect to see more innovation in product structure, continued fee compression, and expand into developing markets. Investors should keep an eye on these trends and predictions as they consider adding ETFs to their portfolio.