By Mark DeCambre
Hello there! If it’s Thursday, it’s ETF Wrap Day! This isn’t the final Wrap of 2021 but it seems like a great time to chat about the outlook for next year, after a record-setting run for ETFs this year.
Remember, 2020? ETFs gained a record $504 billion in new money in the U.S., and who would have thought that we’d surpass that mark by over $300 billion in the middle of December?
$1 trillion anyone? Well, some think that is possible, even if it feels a tad unlikely. Then again, few saw 2021 playing out the way it has thus far.
Bring out the bubbly!
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Read: What is an ETF? We’ll explain.
|Top 5 gainers of the past week||%Performance|
|U.S. Oil Fund LP /zigman2/quotes/203483736/composite USO||1.2|
|ARK Genomic Revolution ETF /zigman2/quotes/206454610/composite ARKG||1.1|
|Goldman Sachs ActiveBeta U.S. Large Cap Equity ETF /zigman2/quotes/201478684/composite GSLC||1.0|
|Xtrackers S&P 500 ESG ETF /zigman2/quotes/213019972/composite SNPE||0.9|
|IQ Candriam ESG US Equity ET F /zigman2/quotes/215563223/composite IQSU||0.7|
|Source: FactSet, through Wednesday, Dec. 15, excluding ETNs and leveraged products . Includes NYSE, Nasdaq and Cboe traded ETFs of $500 million or greate r|
…and the bad
|Top 5 decliners of the past week||%Performance|
|AdvisorShares Pure US Cannabis ETF /zigman2/quotes/220307682/composite MSOS||-6.9|
|ARK Next Generation Internet ETF /zigman2/quotes/201846852/composite ARKW||-4.8|
|ARK Fintech Innovation ETF /zigman2/quotes/205650811/composite ARKF||-4.7|
|ARK Autonomous Technology & Robotics ETF /zigman2/quotes/201937883/composite ARKQ||-2.5|
|ARK Innovation ETF /zigman2/quotes/204808965/composite ARKK||-2.4|
$1 trillion in U.S. ETF inflows?
We talked to some of the smartest people in ETFs to get their take on the next 12 months for the industry.
The elevator pitch: We’ll likely see more of the same for ETFs, unless the stock-market goes pear-shaped (and it is fairly reasonable to argue that even if market’s sour, net flows to certain segments, such as fixed-income and inflation hedging tools, might yet drive flows into positive territory).
Dave Nadig , director of research and CIO at ETF Trends , tells MarketWatch’s Wrap in a Tuesday interview that inflation worries and its impact on investing will be the persistent theme in the near to mid term.
Nadig argues that we could see $1 trillion in U.S. net inflows in 2022, adding that “there’s still a tremendous amount of money” looking to find a place to invest.
“Inflation is going to be a dominant part of the narrative for at least the next quarter or two,” he said, based on his conversations with investment advisers.
“We’ll continue to see a lot of income-oriented products,” Nadig said, noting that investment managers are using such products to hedge risk as well as to gain exposures. “Investors are aiming to find income and managing the volatility,” he said.
“This year already saw clients and channels morphing, and I believe this will continue into 2022,” Anna Paglia, head of ETFs and indexed strategies at Invesco , told Wrap in emailed remarks.
Indeed, firms such as Dimensional Fund Advisors converted mutual funds into active ETFs, which marked an accelerating trend in 2021. Meanwhile, Fidelity Investments and other firms rolled out ETF alternatives of popular mutual funds.
The economy and the impact of omicron variant of coronavirus on markets and business remains the elephant in the room, across the board.
“If we end up with the market down 15% or the VIX at 25, all bets are off,” Nadig said, referring to the Cboe Volatility Index /zigman2/quotes/210598281/delayed VIX -6.47% .
Ben Johnson , director of global ETF research at Morningstar , tells Wrap that 2021 will be tough to top, in terms of flows. “Flows will depend on whether the market acts like a lamb or a lion,” he said in a Tuesday phone interview.
Johnson said that the level of activity new launches in 2021 is worth noting.
“We have 421 launches through Dec. 10, almost double the new open-ended new mutual fund launches in 2021,” he said, noting that ETFs also saw 100 more launches, compared against ETF debuts last year. That includes the likes of Neuberger Berman , which has filed to offer three actively managed thematic ETFs, marking the 80-year-old money manager’s first foray into the fund segment .
So, what does the growth of ETFs mean for other fund types.
“It’s safe to say that the sun is setting on the mutual fund era,” Johnson said. It’s high noon…and we’ve got our spurs on and we are clanking them out as we traverse the dusty road,” he joked. “At the margins, many longtime holdouts are finally joining ETFs.”
That is not to say that ETFs will overtake mutual funds soon (though Nadig isn’t so sure that that isn’t a possibility in the ensuing two or three years), Johnson said.
As of Nov. 30, U.S. mutual funds boast $20.3 trillion in total assets, compared with $6.96 trillion for ETFs, Johnson said.
“Yes, markets have been strong, but more than 600 billion of those dollars have come from new investor inflows,” wrote Rich Lee , head of program trading at Baird , in a research note.
“What that tells us is where money is today. And 75% is sitting in open-ended mutual funds but that number has been steadily shrinking and because money has been flowing more rapidly into ETFs than it has in mutual funds,” Morningstar’s Johnson said.
The Wall Street Journal reported that more than half of the record 380 ETFs launched in the U.S. in 2021 are actively managed, according to FactSet, with Fidelity, Putnam and T. Rowe Price among the firms that have rolled out actively managed ETFs in 2021.
CFRA analyst Todd Rosenbluth told Wrap that actively managed equity ETFs could represent 10% of the asset category’s net inflows in 2022, referencing his recent research report.
Rosenbluth, the head of ETF and mutual fund research at CFRA, also said that thematic ETFs have seen a steady climb, with focus having shifted to electric vehicles and infrastructure in 2021, compared with cloud computing and cybersecurity in the prior period.
“Investors have over 200 thematic ETFs to consider for 2022 as they look to identify the next long-term trend,” he wrote.
Bank on it?