Frank Koudelka, Jeff Sardinha and Ciaran Fitzpatrick from State Street have jointly published their outlook for ETFs in 2023, commenting that ETFs, 30 years since the launch of SPDR, have gone through a number of iterations, with the latest christened by the three as ETF 3.0.
This last iteration of ETFs began in 2008 with the approval of active ETFs, the firm says, which expanded end investor choices and also encouraged new market participation. “This is where we are seeing the next leg of innovation and growth in the marketplace,” the three authors write.
2022 was the year they refer to as the year of the great transition, with ETFs enjoying inflows whatever the financial weather. Last year saw the second biggest inflows in ETF history despite the difficult markets and active seems to be bagging more than its share, with the State Street report noting that in Canada, half of ETF flows went to active ETFs, versus 27 per cent of assets under management and against 16 per cent of flows in the US, versus 5 per cent of AUM.
Canada also distinguishes itself by having the ability to launch ETFs as a share class of existing active mutual funds and does not require active managers to disclose holdings daily which has encouraged asset managers to launch their products in several investment wrappers.
The report also looks at the US market, where it notes that 34 of the top 50 asset managers offer active ETFs either directly or as a sub-advisor. It also looks at South Korea, noting that in 2022, active ETFs made up 14 per cent of assets and 33 per cent of flows.
The report also revisits its predictions from the year before, finding that, yes, there was a new US ETF market US$100 billion issuer in JP Morgan and while they had predicted that active ETFs would make up 70 per cent of new launches in North America, they were closer with 64 per cent of new ETFs in Canada and the US representing active funds.
The firm had also predicted ESG ETFs would account for 70 per cent of European ETF flows and the figure stands at 63 per cent, while Asia did see the first cryptocurrency ETF. However, their predictions for global active ETFs to exceed USD200 billion in net inflows missed the mark with inflows standing at USD123 billion into active ETFs, with North America outperforming while Asia Pacific and Europe underperformed.
Looking forward, State Street notes that flows in the first quarter of 2023 showed no sign of slowing with USD40 billion of inflows in the US in January, nearly double that month’s historical average. The firm predicts that fixed income will shine over 2023, saying: “After years of zero-interest rate policy, central banks have been driving up interest rates to tame inflation. This created shocks to the fixed income ETF market early last year. But the flows accelerated during the second half of the year and ended at over 25 per cent of the total. We expect allocations to fixed income ETFs to exceed 33 per cent this year with yields rising.”
The firm also predicts accelerated growth in Europe, with a ban on inducements and a planned European consolidated tape aiding that growth. The report says that the German market is leading the charge for retail investment in ETFs with over 4.9 million people invest in ETF savings plans, a 150 per cent increase since 2019.