The more things change, the more they stay the same. I would like to think that 2021 was better than 2020; however, I am still crafting these blogs from my house as COVID-19 stubbornly remains in the news. Hopefully everyone is staying safe and healthy and can find time to have a relaxing holiday season! Now on to business.
Last year, I was amazed that the ETF industry brought in almost $500 billion of net inflows. Well, 2021 blew that number out of the water! With a little over a week to go in the year, the net ETF inflow number stands at $860 billion in the United States.1 Impressive! In 2022, I might be writing about our first $1 trillion year! As to how those flows impacted my 2021 predictions, read on.
Prediction #1: ETFs that hold international equities will account for over 50% of 2021 equity inflows.
When I last checked back in July, this number was at ~40%. My confidence in the pick was running high! Unfortunately, there were a ton of flows into ETFs that hold US equities over the last six months. The final percentage of equity flows that came from ETFs holding international stocks was 32%.2
Despite nearly $200 billion flowing into international equity ETFs over the past 12 months, the percentage was lower than I expected because of all those domestic equity flows. In hindsight, I would have been far more accurate predicting a net inflows number instead of a percentage. The overall spirit of the prediction still stands—very strong flows into international equity ETFs. I will give myself some credit for that with a C+.
Prediction #2: We will see even more smaller funds make an even bigger AUM leap.
I predicted that 15 funds that started the year with less than $200 million of assets under management (AUM) would reach the $1 billion milestone by the end of 2021. I knew this was a bit of a stretch goal but liked the trend we were seeing with investors embracing funds irrespective of their AUM or volume. Unfortunately, that number came up a little short as ultimately there were seven funds in 2021, slightly less than half of our predicted amount.3 Although many funds were on track when I checked back in July, most did not cross the $1 billion milestone. Consistent with years prior, the largest ETFs continued to attract the most inflows in 2021.
Prediction #3: Active ETF assets will reach $250 billion.
As noted in the summer check in, I was far too conservative with our prediction on this one. Some stats:
- Total active ETF AUM is currently ~$290 billion, representing ~5% of total ETF AUM in the United States.
- Active ETFs had $55 billion of inflows in 2020, representing 11% of the year’s inflows.
- Active ETFs had $84 billion of inflows in 2021, representing 10% of the year’s inflows.
Even though the lofty mid-year prediction of $350 billion of active ETF assets was missed, the initial prediction of $250 billion was easily surpassed.4Active ETF flows remained very strong throughout the year, and their portion of total inflows was almost identical to that in 2020. As the “ETF rule” enters its third year and investors become even more comfortable getting their active exposure via the ETF vehicle, I anticipate even more market share for active ETFs in 2022.
In summary, there is always room for improvement, but not terrible. One day I will get those elusive straight A’s.
Stay tuned for my 2022 predictions coming soon!
What Are the Risks?
All investments involve risks, including possible loss of principal. The value of investments can go down as well as up, and investors may not get back the full amount invested. 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 12/21/21.
2. Sources: ETF.com, FactSet as of 12/10/21.
3. Source: Bloomberg as of 12/20/21
4. Source: Morningstar as of 11/30/21