The global market for Exchange Traded Funds, better known as ETFs, is projected to more than triple in the next ten years to reach 30 trillion dollars, says Brown Brothers Harriman in a new study it released on Monday. Developments in this market are closely watched in Luxembourg, Europe’s second-biggest hub for ETFs.
ETFs are increasingly finding their way into institutional portfolios, concludes BBH in its annual survey of 325 institutional investors, financial advisors and fund managers from the US, Europe and China.
The survey makes clear that ETFs are benefiting from innovation and are becoming increasingly sophisticated, better matching the need to diversify portfolios. The survey, published annually for ten years now, found growing appetite for fixed income and short-duration ETFs, a clear rise in interest for active ETFs, popularity of alternative and managed risk strategies, and persistent demand for crypto ETFs.
“Having a combination of active and passive and different asset classes in your portfolio is appealing,” Andrew Craswell, senior vice-president, ETF services, at BBH, told Investment Officer. “ETFs really are very efficient vehicles for delivering that to investors. Whether it’s active or passive, ETFs are typically lower cost and provide easy access for investors. So again, the ETF wrapper is appealing from that perspective.”
Although the number of investors who plan to increase their allocations to ETFs in 2023 dropped to 61 percent from 84 percent in a similar survey a year ago, some 89 percent of them still plan to “increase or maintain” their use of ETFs. The 2023 BBH survey is based on input from 325 institutional investors, financial advisors, and fund managers from the U.S., Europe and China.
ETFs now account for 11% of global AuM
ETFs now make up about 11 per cent of global assets under management (88.7 trillion dollars), with mutual funds making up 48 percent of global assets under management, according to BBH.
“We see that kind of hybrid combination of active and passive strategies coming together,” Craswell said. “That is appealing because it offers precision exposure.”
The growth in ETFs is closely watched in Luxembourg, which has seen its share of the overall ETF pie being eroded due to tax competition from Ireland. Luxembourg was home to 276 billion euro in ETF assets at the end of last year, making it Europe’s second-largest hub for ETFs with a 20 per cent market share, according to Morningstar data. Ireland holds a 67 per cent share of the European ETF market with 939 billion euro in assets. Ireland managed to expand its market share thanks to a favourable tax treaty with the US that lowered the withholding tax on US equity ETFs domiciled there. The BBH study did not address specific national markets.
Looking ahead to the next ten years, BBH projects global ETF assets will more than triple to above 30 trillion dollars. At the end of last year, ETF assets amounted to 8.9 trillion dollars, down from 10 trillion. This projection is based on the compounded annual growth rate for ETF assets between 2022 and 2013, when assets stood at 2.2 trillion.
BBH’s projection echos a similar conclusion by researchers at JP Morgan, which forecast the global ETF market will double by 2028 and also saw active ETFs become more relevant.
Global ETF inflows amounted to 856 billion dollars last year, keeping total outflows from mutual funds at 800 billion as rising interest rates, inflation and geopolitical uncertainty forced investors to adjust portfolio strategies. “As investors adapt to volatility, they are diversifying their portfolios and adding more innovative products,” said BBH in its survey.
Craswell said ETFs are proving to be very efficient vehicles for delivering diversification options to investors. “We see that kind of hybrid combination of active and passive strategies coming together. And that being appealing when deploying precision exposure.”
‘Active ETFs here to stay’
Interest in ETFs such as short-duration fixed income ETFs, defined outcome ETFs, alternative and managed risk strategies is strong, BBH noted. Some 59 percent of investors favour defined outcome ETFs, which cap exposures to equity markets and offer a downside protection through a derivative.
Craswell pointed in particular towards actively managed ETFs, which also benefit from increasing investor sophistication.
“The term ETF and the term passive almost became synonymous with one another. But really what the market flows are telling us now is that active ETFs are really here to stay,” he said. “For the active ETF market, we’re almost at the end of the beginning. We expect to see continued growth in both the US and in Europe, for active investment strategies being put into an ETF wrapper.”
The persistent popularity of ETFs also shows that investments the industry has made into investor education are paying off, Craswell said. “Investor education is clearly paying off in the growth of assets. But it’s also paying off in terms of investor sophistication, using ETFs in new ways. Active ETFs. Smart beta ETFs. There’s lots of parts in the ETF market and they are growing, because there’s just this greater understanding and knowledge of how to use the products in the portfolio.”
Crypto exposures
Last year’s market turmoil also inspired professional investors to broaden their diversification into crypto markets. The BBH survey made clear that a quarter of institutional investors expected to increase their allocation to ETFs with crypto exposures. Some 74 percent respondents said they were either extremely interested or very interested in this type of strategy.
“Having a small portion of your portfolio in digital assets or in crypto could be appealing to institutional investors,” said Craswell, also referring to the bitcoin rally seen in recent weeks. “Institutional investors are interested in ‘how can I access those types of asset classes’ in a very safe and controlled way, with institutional features.”
Investors want more ETFs
