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Supplements » ETF Report March 2022

ETFs roundtable: ESG has wound itself into ETFs

Funds Europe – Finally, how might we see the ETF market developing over the next year or two?

Odogwu – ETFs and indexing have been around for a long time, but we are still at a very early point in their lifecycle. In September 2021, they had about $9 trillion in global assets – a minuscule amount compared to a total of more than $200 trillion for capital markets. But we see that figure growing to over $15 trillion by 2025.

Secondly, if we look at Europe in particular, the ecosystem is quite fragmented, but regulatory changes coming via the CSDR [Central Securities Despository Regulation] and others will lead to less fragmentation and this will help to improve ETF trading for investors.

In 2003, there were around 17 fixed income ETFs with $6 billion in assets; now there’s over 1,000 with over $1.7 trillion in assets. We expect this to reach $2 trillion by 2024, so again we see that as a very fast growth area for us and for the industry as well.

Paquier – We see the growth outlook for the ETF market as very promising. By 2025, we think the Ucits ETF market as a whole should reach around $4 trillion of AuM overall, including Ucits ETFs sold outside of Europe.

In terms of products, I believe that ESG will continue to grow significantly and become more tailored with time, delivering solutions that are more customised to meet both growing demand and a growing range of diverse needs. Also, I believe the active space will continue to grow as regulators continue to push for transparency. When ESG and active capabilities are combined in the ETF wrapper, it offers a great foundation for innovation when it comes to thematic ETFs, equities and fixed income.

Cripps – One to two years is actually a relatively low time horizon, but in general I expect to see more of what we have seen 2020 and 2021, so for example we’ll see the continuation of ESG conversions, including instances where asset managers are under internal pressure to report higher ESG assets, but they also want to retain the assets of current exposures.

The market is now starting to see a decorrelation of returns and this is the kind of environment that active managers have been waiting for, to prove themselves again, and in a higher alpha environment, ETF issuers are going to have to prove that their products are still relevant. This may help thematic and smart beta offerings, as well as active ETFs.

Fuhr – There is clearly a development around how ESG products from Europe are becoming adopted in Latin America and Asia, as well as in Europe itself. Investors in Latin America and Asia have realised it benefits them to use ETFs regulated by the European Ucits Directive as opposed to ETFs and mutual funds domiciled in the US.

US mutual funds and ETFs have to pay out income at least once a year while Ucits can accumulate it, and so that’s seen as beneficial. Also, investors are not subjected to US inheritance tax if they buy a Ucits products. More investors are becoming aware of this.

I think the other thing we will see more of is the demand for inflation-linked products, so this means fixed income ETFs but also those developed through the lens of ESG.

Rushe – I am bullish for active ETFs. While ETFs are known to be transparent, low-cost and – in the US market – tax-efficient, the real driver going forward is the liquidity and ease of access. I think the whole ETF story going forward is about access, especially as self-directed investment increases, as retail investors take advantage of broader product ranges to move deeper into markets, and as millennials get older and take an interest in investing. When looking across social media platforms today, you can see that investing is going viral and the ETF structure is perfectly placed to be the product of choice.

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