Advisors know that the exchange traded funds (ETFs) industry’s growth is something to behold. Twenty years ago, there were about 350 ETFs trading in the U.S. As of the end of January, that figure was north of 4,800 with those products combining for a jaw-dropping $13.5 trillion in combined assets under management at the end of last year.
That figure has since ballooned to over $14 trillion. As has been widely documented, advisors are among the primary drivers of ETF adoption – a trend that’s not going to be interrupted anytime soon. Consider the findings of Brown Brothers Harriman (BBH) Investor Services’ 13th annual Global ETF Investor Survey.
The survey polled institutional investors, fund managers, and financial advisors and the takeaway is clear: Those professional market participants are expanding, not cutting use of ETFs.
In fact, 96% of respondents, the same percentage as seen in last year’s survey, plan to expand use of ETFs over the next 12 months. Alone, that’s a compelling data point, but advisors ought to exam how their counterparts in the wealth management community and other professional investors are planning to deploy ETFs over the coming year.
Active Embrace Will Continue
Driven by factors including mutual fund conversions and embrace of fixed income products, these are halcyon days for actively managed ETFs – another trend that’s unlikely to be disturbed over the near-term.
“Investors are reshuffling portfolios to accommodate more active ETFs: 53% will reduce index-based ETF allocations, and nearly half will cut index and actively managed mutual funds. With active ETF assets nearing $2 trillion, 94% believe they’ll top $10 trillion within a decade, and 77% expect this milestone in seven years,” according to BBH.
On a note related to the growth of actively managed ETFs, more ETF share classes of active mutual funds are coming to market. Last November, Dimensional Fund Advisors (DFA) became the first firm since Vanguard to gain regulatory approval for ETF share classes. Many more have applied for that permission and are expected to land it, indicating the ETF share class population could soon surge. Professional investors, including advisors, appear to be on board with that.
“Among these emerging structures, interest is especially strong in ETF share classes of mutual funds, which blend operational familiarity with ETF efficiency. A large majority of investors say they would invest in an ETF share class, signaling that hybrid structures may become important for future growth globally,” adds BBH.
Active ETFs Drawing Adulation, but not Replacing Passive Peers
Advisors also know that regardless of fund structure, active and passive investing have long been pitted against one another. With ETFs, it doesn’t have to be that way and it’s not. The reality is active ETFs aren’t going to replace passive counterparts in wholesale fashion because many investors, including plenty of advisors are fee-conscious and in some market segments, active managers struggle to beat benchmarks with any level of noteworthy consistency.
However, active ETFs offer the same tax advantages and transparency as do their passive rivals and they feature lower fees, broadly speaking, than mutual funds so there’s a long runway for active ETF growth.
“Rather than replacing passive strategies, active ETFs are increasingly used as complements that offer flexibility, risk management, and the potential for differentiated outcomes when markets shift,”: concludes BBH. “Two thirds of investors now view active management as the more attractive approach over the next 12 months, and nearly all plan to increase their exposure to active ETFs.”