January is a month of resolutions and prognostications, so it’s also time for my 5th annual ETF predictions column! You can find all prior editions (2020, 2019, 2018 and 2017) if you’d like to revisit them. You can also find my 2020 report card column here.
I must admit that there were a lot of mixed emotions in writing this year’s outlook column. On the one hand…2020. Ugh! I would most certainly put myself in the “let’s go ahead and turn the page on this dumpster fire of 2020” camp. On the other hand, my family is happy and healthy, and from an ETF perspective, 2020 was fantastic. When the dust settles, ETFs will have seen somewhere around half a trillion dollars of inflows for the year 2020.1 Astonishing!
Given that even a global pandemic cannot seem to slow down these markets, it would not surprise me if the trend of ETF inflows continues unabated. That possibility certainly helped drive several of my predictions for this year. Without further ado:
ETFs that hold international equities will account for over 50% of 2021 inflows
Here are the two relevant stats for US-listed equity ETFs that hold international stocks:2
- They account for approximately 25% of ETF assets under management (AUM) in the United States
- In 2020, they represented 26% of the ETF equity inflows.
I fully acknowledge that getting to 50% is a significant leap; however, there are some recent trends that could certainly help. Many international equity markets have lower valuations when compared to US equities. Worldwide, countries have handled their responses to the global pandemic very differently in terms of economic stimulus, which certainly helps the case for targeted single-country investing. Lastly, a new US administration may take a very different approach to international trade, which could also impact foreign currencies, a major factor in the returns of US ETFs that hold international stocks.
Put all those possibilities together and there is a real chance for some significant international equity investments via US-listed ETFs.
We will see even more smaller funds make an even bigger AUM leap
As a reminder, this is an ETF Capital Markets blog. For more than four years now, I have discussed ETF trading and liquidity in these pages and tried to push back on all their associated misconceptions. I have not been afraid to use everyday analogies including restaurants, furniture shopping, and even buying an a mattress online. Heck, I broke out quantum physics this past year!
As such, it should not be surprising that I enjoy seeing the adoption of smaller ETFs. I might sound like a broken record, but to repeat what I wrote on this topic last year: investors continue to become more comfortable with the best practices when trading newer funds and understand that trading multiples of the average daily volume is now commonplace.
Thus, for the third straight year I am going to make a prediction based on smaller funds continuing to attract significant interest. As you will recall from my report card, more funds made a significant AUM leap over $500 million than I had anticipated this past year. That means we now need to move the bar even higher.
In 2020, there were 1,227 ETFs that started the year with under $200 million.3 We saw 10 of these funds finish the year with over $1 billion of AUM. That is a monster leap! Yes, the positive market moves in some asset classes certainly helped, but the only way to get a 5x-AUM move is with some serious inflows. And the only way to get serious inflows is that investors need to 1) like the investment philosophy of the ETF and 2) understand that trading and liquidity is not an issue.
This year starts with 1,130 ETFs that are under $200 million in AUM. By the end of 2021, I predict 15 of these funds will brag about reaching the $1 billion milestone.
Active ETF assets will reach $250 billion
I discussed the inflows into active ETFs a fair amount in my 2020 scorecard. To repeat some of the key stats here:
- Total active ETF AUM is currently ~$170 billion, which represents ~3% of all ETF AUM
- Active ETFs had $55 billion of inflows in 2020, which represents ~11% of inflows in 2020
As with my other predictions, there are a lot of reasons for optimism. Investors are becoming more comfortable with getting active exposure via ETFs, partly due to the ETF Rule, which is now live for all ETF issuers. It explicitly states that there is no operational difference between active and index ETFs. Semi-transparent active ETFs launched for the first time in 2020, and now collectively have almost $1 billion in assets.4 Increased adoption and discussion of semi-transparent ETFs can only help to increase the overall industry awareness of all active ETFs, especially transparent active funds, which make up almost all the active ETF assets.
My team and I feel the percentage of ETF inflows coming from active ETFs will continue to rise. Assuming positive market moves and continued adoption of ETFs, we think $250 billion of active assets is well within reach.
Important Legal Information
David Mann’s comments, opinions and analyses expressed herein are for informational purposes only and should not be considered individual investment advice or recommendations to invest in any security or to adopt any investment strategy. Because market and economic conditions are subject to rapid change, comments, opinions and analyses are rendered as of the date of the posting and may change without notice. The material is not intended as a complete analysis of every material fact regarding any country, region, market, industry, investment or strategy.
This information is intended for US residents only.
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All investments involve risks, including possible loss of principal. Generally, those offering potential for higher returns are accompanied by a higher degree of risk. Stock prices fluctuate, sometimes rapidly and dramatically, due to factors affecting individual companies, particular industries or sectors, or general market conditions. For actively managed ETFs, there is no guarantee that the manager’s investment decisions will produce the desired results.
ETFs trade like stocks, fluctuate in market value and may trade above or below the ETF’s net asset value. Brokerage commissions and ETF expenses will reduce returns. ETF shares may be bought or sold throughout the day at their market price on the exchange on which they are listed. However, there can be no guarantee that an active trading market for ETF shares will be developed or maintained or that their listing will continue or remain unchanged. While the shares of ETFs are tradable on secondary markets, they may not readily trade in all market conditions and may trade at significant discounts in periods of market stress.
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1. Source: Bloomberg, as of 12/31/20.