The funds industry will see assets in the ETF sector reach $30 trillion in the next ten years, helped by greater inflows to active ETFs and by traditional asset managers entering the market, research indicates.
The emergence of active products coincides with other factors - such as the ending of ETF trading commissions by a number of platforms – to drive assets upwards from around $10 trillion at present, according to the asset servicing division of Brown Brothers Harriman (BBH) bank.
Growth in the sector is despite data showing a reduction in the number of investors who said they would increase ETF holdings in the coming year.
BBH surveyed 325 investors, financial advisers and asset managers in the US, Europe and Greater China and predicts assets under management (AUM) in ETFs will be more than $30 trillion by 2033 based on historical annual growth.
The market – currently at $9.23 trillion of AUM according to data provider ETFGI – has grown 16% annually over the last decade, BBH said.
Some 89% of investors plan to maintain or increase ETF allocations over the next 12 months. However, there was a 23% fall in those who said they would increase holdings: down to 61% from 84% a year ago.
“I’m surprised by that,” said Andrew Craswell, head of ETF services for BBH in Europe. “But I think this is about market nervousness in general, and the number of those planning to increase allocations is still strong.”
“End of the beginning for active ETFs”
The research showed that 66% of investors moved money from mutual funds into ETFs in 2022 – a finding that Craswell described as possibly indicating “the end of the beginning for active ETFs”. This is due to a strong move into active products, with 82% of investors planning to increase or maintain their exposures to active ETFs this year.
Conversions from mutual funds into actively managed ETFs are intensifying, the firm’s research found. Some 92% of investors bought an active ETF in the last 12 months, with 46% funding their allocation by switching out of index mutual funds and 42% switching from active mutual funds.
Craswell added: “Ten years ago, ETFs were synonymous with passive investing. But this year, ETFs are now becoming a vehicle or wrapper that can be used to deploy active investment solutions. Investors like the flexibility of the ETF wrapper and recognise there is a space for active management within ETFs.”
Other key findings of BBH’s 10th annual ‘Global ETF Investor Survey’ were:
• Strong interest in fixed income ETFs, including 40% of respondents expecting to allocate more of their portfolios to short-duration bonds
• Nearly 70% plan to maintain or increase allocations to commodity ETFs, which follows a year when seven out of the top 10 best-performing ETFs were commodity products
• Some 74% of institutional investors said they were extremely or very interested in cryptocurrency exchange-traded products, which Craswell puts down to a diversification play.
ESG continues to grow, with 53% of respondents overall planning to add ESG exposures this year. The figure for Greater China was higher, at 62%. The figure for the US – a country where sentiment for ESG is seen to be turning negative - was actually one percentage point higher than for Europe – 45% versus 44%. However, at 8%, the US had the highest number of respondents who do not hold or intend to hold, ESG ETFs compared to 2% and 1%, respectively, for Europe and Greater China.
Lack of client interest and concerns about performance were the two main reasons for US reticence.
According to BBH, in Europe, ESG inflows attracted 65% of all ETF inflows last year ($51 billion out of $78.4 billion), and by the end of 2022, ESG ETFs accounted for 19% of the European ETF market.
Ireland’s ETF advantageEuropean investors cited tax efficiency as their chief ETF selection criteria, whereas expense ratios were more important for US respondents and index methodologies for Greater China respondents.
“This is interesting, as there are ways to defer capital gains in the US but not in Europe,” said Craswell.
He further pointed out that ETFs domiciled in Ireland have a tax advantage over those in Luxembourg. The withholding tax on ETFs invested in US equities is 15% in Ireland if certain criteria are met. This contrasts with 30% in Luxembourg.
Craswell also said the tax position meant European-domiciled ETFs were becoming more appealing to international investors compared to those domiciled in the US.
“As the European market has grown, there is more liquidity now, and so the tax benefit comes into greater focus,” he said.
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