Innovation bubbling away
in the world of ETFs

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July 20, 2020
 

An early 2020 BNY Mellon Asset Servicing ETF survey highlights interesting industry undercurrents that may offer opportunities for issuers and investors alike in the near future. Here we look at the survey findings with our view as to what it means for our own BNY Mellon Investment Management offerings in this space.

The global rise of exchange-traded funds (ETFs), continues apace. By the end of 2019, the global ETF market was worth some $6.35 trillion,1 up over 30% from 2018 and over 100% from 2015.2 But what does the future hold? Our sister group, BNY Mellon Asset Servicing, commissioned a client survey to find out. This survey took in a wide range of ETF issuers and investors. All were attendees at the 2020 Inside ETFs conference, which was held in Florida this February 2020. In total, 37 issuers and 52 investors shared their thoughts with BNY Mellon representatives.

US equity remains popular

Even as ETFs continue to grow rapidly, investor focus remains on US equities. Some two-thirds of buyers and suppliers are planning to be active there. Issuer interest in this asset class is currently more than 50% greater than in its closest competitor, international developed-market equity.

Although the investment community is seeing more product launches that cover other regions, the US looks set to dominate both issuance and investment in the year ahead. All of the issuers that responded to the BNY Mellon survey said they were planning US product launches in 2020. Meanwhile, planned launches in Europe, the Middle East and Africa (EMEA) were up from 8% of issuers in the BNY Mellon 2019 survey, to 19% in 2020.

Another area where continuity is clear is in investors’ priorities. The perceived low cost of ETFs remains a central attraction for the asset class. This is true both for individual investors and for financial professionals, who use ETFs as building blocks when helping clients to construct portfolios. Tax efficiency was the second-highest priority for investors, with concerns about liquidity and income bringing up the rear.

Areas of interest

Although the dominance of US equities looks set to remain unchallenged, it’s clear a lot of innovation and opportunity is bubbling under – with growing interest in a number of areas currently outside the mainstream.

Beyond US equities, issuers in the survey cited international developed-market equity, high yield bonds, and fixed income in general as their next-highest launch priorities. Meanwhile, investors themselves ranked smart beta, emerging-market equity, and corporate fixed income as their next most likely purchases.

Still both issuers and investors alike agreed one likely boom area is environmental, social and governance (ESG) investing. Here, the increases in both supply and demand are eye-catching. Issuance of ESG ETFs more than quadrupled in 2019 from 2018, and demand registered an increase of more than 50% (from 16% to 25%). These increases were from a low base but demonstrate a real appetite for socially responsible investing in the ETF market.

Then there is active ETF investing, a market that grew to $156bn in 2019, a 46% increase from 2018 that contributing to a five-year compound annual growth rate of 46%. More than two-thirds (69%) of investors highlighted they were planning to invest in active ETF products in 2020. Given the Covid-19 pandemic and its economic consequences to cause a severe shakeout in the corporate world, the authors of the survey believe active ETFs could have significant room to accelerate as more discerning approaches come to the fore once more.

“As this survey demonstrates, clients are voting with their feet and are increasingly utilizing ETFs in their portfolios to achieve a variety of investment objectives,” says Stephanie Pierce, CEO of ETF, Index and Cash Investment Strategies at BNY Mellon Investment Management. “This is why when we launched our ETFs this spring we looked at offering a variety of options to investors—including some specialist fixed income solutions that can play an important role in portfolios, particularly in the current environment.”

Challenges – and opportunities

It’s important to note the BNY Mellon survey took place before the Covid-19 pandemic had accelerated – and before its severe impact on the global economy and financial markets materialized. Volatility was nevertheless already investors’ main concern, with 48% of respondents citing it. Political instability was a close second; with 44% of respondents mentioning it, and other worries far less prominent.

Issuers, however, had somewhat different priorities back in February. For them, volatility and political instability were tied as chief concerns, with 38% of respondents mentioning each. Regulation was almost as much of a concern for this group; 35% mentioned it compared to just 17% of investors. Low interest rates also loomed much larger for issuers (24%) than investors (17%).

Demand for educational materials

Another key finding from the BNY Mellon survey was the perception of an on-going education gap when it comes to ETFs. Over 40% of issuers thought “what is an ETF?” was among the topics in which investors require training. Yet many issuers also believe investors are ready for a more sophisticated level of education, particularly in regard to how ETF managers source liquidity for larger trades.

Meanwhile, more than half of investors are buying their ETFs through broker/dealers – suggesting they still value guidance. The conclusion drawn from the 2020 survey was that while ETFs are increasingly an important consideration for investors, many do not feel sufficiently well-informed to make decisions about these products on their own.

Conclusion

The 2020 BNY Mellon ETF survey provides a snapshot of the ETF period at the start of this year. Overall, it shows continuity in the ETF environment but with some innovative trends happening, albeit on a relatively small scale for now.

Given the momentous economic impact of Covid-19, the trends identified by the survey’s findings may be delayed. Or, says BNY Mellon, the seismic shifts the pandemic has wrought could serve to accelerate these trends.

“As we see from this survey, demand for low-cost, liquid, and tax efficient investment options continues to accelerate with US equities commanding the greatest share of investor interest,” says Pierce. “It’s clear that ETFs can play a larger role in client portfolios and the range of ETF choice available to investors will only broaden and grow from here. Our firm’s leadership position across the ETF ecosystem and our ongoing dialogue with clients, including this annual survey, help to deepen our understanding of evolving client needs and inform our ETF innovation agenda moving forward.”

1 ETFGI: ETFGI reports assets in the global ETFs and ETPs industry which will turn 30 years old in March started the new decade with a record $6.35 trillion US dollars. January 2020.

2 BNY Mellon ETF survey 2020. February 2020.

 

Definitions:

Smart Beta: A type of investment portfolio that emphasizes capturing investment factors or market inefficiencies in rules-based transparent way.

ESG: Environmental, social and governance criteria are a group if standards used by socially conscious investors to screen investments.

Issuer: A legal entity that develops, registers and sells securities to finance its operations.

Investors should consider the investment objectives, risks, charges and expenses of a fund carefully before investing. To obtain a prospectus, or a summary prospectus, if available, that contains this and other information about a fund, contact your financial advisor or visit im.bnymellon.com. Please read the prospectus carefully before investing.

ETF shares are listed on an exchange, and shares are generally purchased and sold in the secondary market at market price. At times, the market price may be at a premium or discount to the ETF's per share NAV. In addition, ETFs are subject to the risk that an active trading market for an ETF's shares may not develop or be maintained. Buying or selling ETF shares on an exchange may require the payment of brokerage commissions.

ETFs trade like stocks, are subject to investment risk, including possible loss of principal.

Diversification cannot assure a profit or protect against loss.

Past performance is no guarantee of future results.

Bonds are subject to interest rate, credit, liquidity, call and market risks, to varying degrees. Generally, all other factors being equal, bond prices are inversely related to interest-rate changes and rate increases can cause price declines. High yield bonds involve increased credit and liquidity risk than higher rated bonds and are considered speculative in terms of the issuer’s ability to pay interest and repay principal on a timely basis. Equities are subject to market, market sector, market liquidity, issuer, and investment style risks to varying degrees. Small and midsized company stocks tend to be more volatile and less liquid than larger company stocks as these companies are less established and have more volatile earnings histories. Investing in foreign denominated and/or domiciled securities involves special risks, including changes in currency exchange rates, political, economic, and social instability, limited company information, differing auditing and legal standards, and less market liquidity. These risks generally are greater with emerging market countries.

Views expressed are those of the author stated and do not reflect views of other managers or the firm overall. Views are current as of the date of this publication and subject to change. This material has been distributed for informational purposes only and should not be considered as investment advice or a recommendation of any particular investment, strategy, investment manager or account arrangement. Please consult a legal, tax or financial professional in order to determine whether an investment product or service is appropriate for a particular situation.

No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission.

BNY Mellon Investment Management is one of the world’s leading investment management organizations and one of the top U.S. wealth managers, encompassing BNY Mellon’s affiliated investment management firms, wealth management organization and global distribution companies. BNY Mellon is the corporate brand of The Bank of New York Mellon Corporation and may also be used as a generic term to reference the Corporation as a whole or its various subsidiaries generally. BNY Mellon ETF Investment Adviser, LLC is the investment adviser and BNY Mellon Securities Corporation is the distributor of the ETF funds, both are subsidiaries of BNY Mellon.

©2020 BNY Mellon Securities Corporation, distributor, 240 Greenwich St., New York, NY 10286.

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