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The Ever-Changing ETF Globe

Cinthia Murphy

It’s been a busy year for ETFs. Global ETF assets are growing at a faster pace in 2019 than in the past decade. Fixed income ETF demand is currently at record levels. Nontransparent active ETFs passed regulatory muster and will soon hit the U.S. market. Institutional usage of the ETF wrapper is expanding as well.

Debbie Fuhr, who runs consulting and ETF research analytics firm ETFGI, has been closely monitoring all of these events. Her firm is about to kick off a series of conferences, beginning with the ETFGI Global ETFs Insights Summit in Toronto on Dec. 2, to talk about all of this and more. Here, she offers a taste of the hottest topics in ETF land this year.

 

ETF.com: What key trends in ETF adoption globally stand out to you in 2019?

Debbie Fuhr: It’s been a very good year for ETFs, partially fueled by the fact that many active funds have not been delivering alpha, hedge funds are not delivering enough alpha, and people are increasingly using ETFs to generate alpha through asset allocation. We’re seeing ETFs being adopted in new channels, such as insurance companies and pension funds.

We've seen a real interest, especially outside the U.S., in ESG [environmental, social and governance] and thematics. That’s going to carry over to the U.S. We also see greater adoption by financial advisors and retail outside of the U.S., where historically advisors have been paid to sell other products, because ETF issuers don't pay them to sell. As regulations change, we're seeing growth in ETF use in those channels.

Right now, we’re seeing, globally, record inflows this year at $410 billion net new, which is slightly above the $379 billion of net new at this point last year.

ETF.com: In the U.S., we’ve seen record flows into fixed income ETFs this year. Is this going to be a milestone moment for fixed income ETF adoption—a year when usage really changed, or, a one-off tied to economic environment?

Fuhr: This will be a record year for fixed income ETFs. I also think that insurance regulators allowing ETFs to fit into products that insurance companies can use has been a real game changer for flows and adoption.

We're seeing all sorts of fixed income investors now using ETFs, where historically it's been more of the multiasset class teams and discretionary fund managers using ETFs. Fixed income ETFs have definitely crossed over into the mainstream product set, where that wasn’t the case a couple years ago.

ETF.com: Looking at 2020, what are going to be some of the hot ETF themes?

Fuhr: One of the big things will be the 30th anniversary of the listing of the first-ever ETF in March in Canada. We'll also be celebrating the 20th anniversary of the first ETFs in Europe, and also in South Africa. That puts ETFs as a more established product, and one that’s going to be here for the long run.

We'll also see movement in the nontransparent active space. Let me clarify that I'm trying to get people to call it “periodically disclosed ETFs,” because the firms that launch these types of products could disclose daily if they want to; could do it weekly; could do it monthly; or could do it quarterly like a mutual fund. “Periodic” is a better name. But this is a space we’ll be watching in 2020.

We’ll also see products come to market from new issuers. Because of the ETF Rule, we’ll see a more level playing field for ETFs relative to mutual funds. They will not have to go to the SEC and ask permission for exemptions to be able to come to market.

We’re likely also to see big tech firms play a more important role in asset management. Google is now partnering with banks to offer checking facilities. We’re likely to see a Google, an Amazon have a "go compare" type of application that would be quite useful for many people.

ETF.com: You have a series of ETF conferences coming up around the world. Are there issues that are universal in nature? Or are there big differences in local markets that will make for some interesting discussion?

Fuhr: What happens in Canada is very different than what's happening in London versus Hong Kong or New York, which are the venues where we hold the events.

In Canada, active ETFs and nontransparent—or periodically disclosed—have been around because ETFs are regulated like mutual funds there. You've seen the active products account for about 21% of all the assets in Canada. We've also seen a move by the regulator to allow liquid alts. We've also seen a growing interest by regulators in ESG.

ETF.com: Why is it that, in Canada, active ETFs are so successful—21% market share—where in the U.S., their traction is so much lower? Does active management work there?

Fuhr: I'm not sure you could say that it works better in Canada than in the U.S., because we do see challenges with active funds delivering alpha. What I would say is, because the products that have come to market can take advantage of not providing daily transparency, you're seeing portfolio managers who feel they have secret sauce embracing the ETF wrapper. Whereas historically, in the U.S., you haven't seen that many firms that feel they have secret sauce want to come out with ETFs that provide daily transparency. That changes the product set that's out there.

ETF.com: That means nontransparent active ETFs could really change the ETF landscape in the U.S. where active represents less than 2% of assets.

Fuhr: Yes. I guess the challenge will be that people, when they select active, normally want to see three years of track record performance, and they typically want to see $100 million in assets under management.

The challenge will be, in the U.S., what products come to market. As you know, Vanguard has patented the share class model, and that patent goes until 2022. My understanding is Vanguard is not interested in licensing that to other people, so we won't see the share class model come out.

The question then is, if someone wanted an ETF that looks like an existing fund, do they decide to convert? I don't think many of the firms that are getting paid 12b-1 fees would want that to happen, because they would need to move to the ETF without 12b-1 fees.

Another challenge is whether the SEC and the IRS would allow it to be done in a tax-efficient fashion. We did see Syntax bring to market a fund—which wasn't a mutual fund, it was a private fund—and it was allowed to carry over four years of track record and carry over assets and come to market as an ETF. Will we see people converting mutual funds into ETFs? That would clearly grow assets significantly in the U.S. ETF industry next year.  

Contact Cinthia Murphy at cmurphy@etf.com

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