If you were to ask any market strategist today about their predictions for ETF trends in 2022, you’d hear the word “intriguing” used repeatedly.
Wall Street has started the year on a positive note, with the Dow Jones and S&P 500 hitting new highs. The global ETF industry as a whole rocketed in 2021, setting new highs in terms of inflows. According to etf.com, investors pumped $900 billion into US-based ETFs last year.
While inflation and tighter policies continue to taunt the bullish, a stronger economy, higher corporate returns, and growing customer confidence are becoming important catalysts for optimism where ETFs are concerned. Indeed, the European ETF market has been a good indicator for this – which saw another strong year of expansion and saw assets reach $1.5 trillion at year’s close.
Several key themes have developed over the last year that will likely affect the industry in the years to come. While some of these are still in their early days, and some are subjects of contention, investors will likely cross paths with them at some point in the near future.
Here are some of the most interesting ETF trends to look out for this year.
- Rise of the cryptocurrency ETF
- Passive investing will dominate
- Advancement of new inflation hedge ETFs
- The ‘Social’ pillar of ESG
- Direct indexing of portfolios
- Active ETF assets will gain more traction
- Common ownership among ‘Big 3’ providers
Rise of the cryptocurrency ETF
With ever-rising investor interest in crypto, coupled with the fact that various countries worldwide have already allowed their implementation, we can anticipate that US regulators will develop an oversight structure that will accommodate cryptocurrency ETFs.
Indeed, the launch of the Bitcoin ETF in October was, according to CFRA’s head of ETF and mutual fund research, Todd Rosenbluth: ‘the fastest ETF to get to $1bn in assets… from an asset growth and trading volume perspective this is unprecedented and is a sign of the pent-up demand.’
The initial wave of ETFs, according to speculation, is predicted to start employing options to get exposure to cryptocurrency, as opposed to outright cryptocurrency ownership.
A passive Bitcoin and Ethereum, as well as an active, broadly diversified cryptocurrency ETF are all possibilities. Over time, we anticipate that investors will handle bitcoin products in their portfolios in the same way they do any other liquid alternative investment.
Passive investing will dominate
Passive investing, like last year, is predicted to be a hot topic in 2022. This is particularly true given that passively managed US funds – which monitor BlackRock, State Street, and Vanguard Group indexes and collectively own over three-quarters of all US ETF assets – were the top money pullers in 2021.
Passively managed funds are also appealing due to their transparency, inventiveness, unique strategy, diversification perks, tax efficiency, low turnover, and not to mention the reduced cost.
This year, inflation expectations will be a defining factor for many investors and their asset allocations. The discussion over whether the latest inflation spike – which peaked in November of last year, seeing the consumer price index (CPI) increase 6.8% year over year (the highest level since June 1982, when inflation reached 7.1%) – is temporary or permanent is expected to continue well into the new year.
An ETF Stream survey showed that a rise in inflation could prompt central banks to clamp down on monetary policy quicker than market expectations can react, while a lack of inflation could lead to economies overheating. (An overheated economy is one that has had a long period of strong economic growth and activity, which has resulted in high inflation caused by greater consumer affluence.)
If inflation remains, we’ll likely see flows continue towards commodities ETFs and ultrashort bond ETFs, as well as gold ETFs (long regarded as a safe refuge in times of economic instability and a hedge against inflation.).
Advancement of new inflation hedge ETFs
Due to this inflation, almost everything has risen in price in the last year, from food to raw materials to transportation charges. Prices continued to rise as a result of pandemic-related supply shortages and strong consumer demand.
In November, core inflation, which excludes volatile components like energy and food costs, increased by almost 5% year over year – which is the highest increase since 1991. (read more about this here: “Inflation to Stay Hot in Early 2022: ETF Strategies to Win”.)
Battling with these inflationary conditions, investors will resort to ETFs such as the AXS Astoria Inflation Sensitive ETF PPI, which was introduced on December 30. This ETF aims for long-term capital appreciation in inflation-adjusted returns and offers investors a broadly diversified inflation strategy that includes cyclical stocks, commodities, and TIPS.
The ‘Social’ pillar of ESG
Environmental, Social, and Corporate Governance (ESG) is an evaluation of a company’s collective social and environmental consciousness. Socially conscious investors utilize these criteria to screen possible investments.
Last year was another watershed moment for ESG investment, with ESG ETFs accounting for over half of all inflows. Many of the flows went into environmentally-orientated ETFs and many launches targeted climate-related goals, like the Paris Aligned Benchmark.
DWS Group (DWS), one of the world’s leading asset managers, is now collaborating with index providers to supply and construct more customized benchmarks that focus on the ‘S’ in ESG, which targets companies that have a beneficial impact on many sectors of society. A spokesman of DWS says this is an area “ripe for innovation.”
Direct indexing of portfolios
Direct indexing allows a client’s portfolio to be entirely customized to their preferences, such as allowing them to exclude stocks that contribute to climate change, for example.
Some have dubbed it the “next frontier” of asset management because it allows investors to gain access to certain benefits such as lower tax costs, or the avoidance of overlapped exposure to large single-stock positions held elsewhere.
On the other hand, critics are concerned that it is, in essence, active management by the end investor, as this is a task that even professional money managers fail to do well. That said, actively managed ETFs are steadily growing in popularity.
Active ETF assets will gain more traction
At the end of 2020, active ETF assets were estimated to be about $200 billion. By the end of 2022, this asset level is expected to reach $400 billion. Growing market volatility, the adoption of active semi-transparent ETFs, and the continuation of mutual fund to ETF conversions are all driving factors of the rising interest in active ETFs.
Common ownership among ‘Big 3’ providers
Common ownership issues among the ‘Big Three’ providers — BlackRock, State Street Global Advisors, and Vanguard – might cause problems in the coming years. According to ETF Stream, it is one of the most significant issues facing the ETF and indexing industry as a whole.
Indeed, 2022 has been labeled by Robin Wigglesworth as the defining battlefield for the ETF industry for the next 10 years, with predictions suggesting that the ‘Big Three’ might own as much as 33% of shareholder votes by 2032. According to John Coates of Harvard Law, this has the potential to result in the biggest concentration of economic power in our lifetimes.
The ‘Big Three’ will very certainly need to act to avoid future regulations restricting their ownership, and plans to rectify these issues could be put into works as early as 2022.
We look forward to watching the continued expansion of ETFs this year and will check in with you again next year to see how accurate the trend predictions for 2022 were.
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