The ETF market goes global

From robust growth in Asia and Europe to an investor pivot toward emerging market funds, Global X ETFs CEO Luis Berruga sees a bright future for the global ETF market.

There is no doubt that exchange-traded funds (ETFs) are undergoing a transformative period of growth, with experts predicting that the ETF industry could soar to $15 trillion in assets as soon as 2028. And there is also little doubt about why investors are increasingly interested in ETFs – from tax efficiency to higher levels of transparency to typically lower fees, ETFs offer a wide range of benefits relative to traditional mutual funds.

Yet, the rise of ETFs is happening at different paces in different global markets. For example, The US is the most advanced ETF market, with more than one in ten households holding ETFs in their portfolios and approximately one-third of all trades occurring in the secondary ETF market. I have witnessed this massive US domestic growth accelerate first-hand since I joined Global X ETFs as COO in 2014 when total US ETF assets were only about half of what they are today. However, it is increasingly clear that the future of ETFs – both the components of the funds themselves and the people who own and trade them – is increasingly global as adoption in other parts of the world catches up.

ETF market growth appears robust in Asia and Europe
ETF growth appears to be following the rapid progress made in the US in recent decades in other markets as well. Growth is particularly robust in Asia, where a majority of managers say they are developing ETF products. The region has shown particularly strong interest in investing in thematic ETFs, including tech-related themes such as batteries and artificial intelligence.

In Europe, despite a volatile 2022, flows appear to be steadily rebounding in 2023, with Europeans increasingly eyeing ESG-related funds. In fact, ESG funds now represent approximately one-fifth of the European ETF market as both the public and private sector race to meet the needs of the global energy transition. From wind and solar energy production to the batteries and underlying raw materials powering electric vehicles (EVs), a range of themes may benefit from such a pivot in European markets. Europe is also tracking the US industry’s trajectory when it comes to actively managed ETFs. In Europe, the number of active ETFs, in which portfolio managers seek to beat a specific benchmark, nearly doubled over the last six years, still trailing the US but closing the gap between the regions.

Investors turn to emerging market ETFs

However, it’s not only the ownership of ETFs becoming more global in scope but also the components that make up the funds – there is growing interest in ETFs which represent geographic plays on specific national markets. Emerging market (EM) ETFs, for example, are gaining in popularity, with many such funds now gathering tens of billions in assets.

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As China reopens its economy following strict lockdown rules, investors are taking another look at the growth opportunities offered by EM funds. This includes both broader and sector-specific EM funds as well as plays on individual countries in regions such as Asia and Latin America. These funds are sensitive to fluctuations in the US dollar, and a weakening dollar off of last year’s high may make investing in these regions particularly appealing in the coming period, given their dependence on borrowing in US dollars and dependence on commodities priced in dollars. While some investors worry about the volatility inherent to emerging economies, exposure to these funds can also have a diversifying effect on a portfolio which helps manage volatility.

The future of ETFs is global

More broadly, as the ETF industry matures and the investor base diversifies geographically, it is unsurprising that the regions in which they invest will diversify as well. Regardless, there is no doubt that more and more money managers across the world are recognizing the unique liquidity and cost benefits of the ETF wrapper and adjusting their portfolios accordingly. When investors consider the future of ETFs, they are going to have to think more globally than ever. ETFs are undoubtedly becoming the investment vehicle of choice for the large majority of investors around the world, and I am confident that this trend will only accelerate further.