Exchange traded funds had a banner year in 2020.
New fund launches reached a record 276, fund flows climbed to a record $514.9 billion and one independent fund company, ARK Investment Management, had five active ETFs that crushed most others in the industry in terms of their performance.
Can such good times continue into 2021?
ThinkAdvisor spoke with a number of ETF experts about their outlooks for the industry next year. Here are some highlights of those discussions
1. Existing Trends to Continue
“If there’s anything we can count on in 2021 is that many of the trends that have been in place for a number will continue,” said Ben Johnson, director of global exchange-traded fund research at Morningstar.
“Investors will continue to show preference for the largest, most liquid and lowest cost ETFs and we will see more new entrants. Barriers to entry are lower than ever,” Johnson explained
Helping new entrants is the SEC’s new ETF rule, which was approved in September 2019. It allows fund companies to launch new ETFs without seeking exemptive relief for each one.
DFA cited the SEC ETF rule when it announced in November the launch of its first ETFs and plans to convert several of its mutual funds into ETFs.
(Related: DFA Files for 6 More ETFs)
“It’s quite clear as you look at flows for industry over the last decade that investors are voting with their feet, preferring ETFs to mutual funds,” said Jim Atkinson, the CEO of Guinness Atkinson Asset Management which has plans to convert two mutual funds to ETFs next year.
“I have come to the conclusion that ETFs are a better value proposition for investors,” said Atkinson.
ETFs have more tax efficiency, transparency and trading flexibility than mutual funds and are generally cheaper to own than funds because they have lower costs for fund sponsors.
2. Mutual Fund Conversions, Clones
“Mutual funds bleed assets, and they all show up in ETFs,” said Dave Nadig, chief investment officer and director of research at ETF Trends.
“More and more active managers will have to include ETFs as a means of accessing their strategies,” said Morningstar’s Johnson.
Case in point: T. Rowe Price, which like DFA launched its first ETFs in 2020. The T. Rowe Price ETFs are actually non-transparent actively managed clones of existing mutual funds, with slightly lower fees.
The firm is among a handful that launched non-transparent ETFs in 2020, and more are expected in 2021.
Nadig anticipates more cloned ETFs coming to market in 2021, both transparent and non-transparent.
He expects they will outnumber ETF conversions because retirement plans will continue to favor mutual funds. Johnson anticipates more active ETF launches.
3. More Thematic, ESG ETFs
Strategists also expect that 2021 will witness the launch of more thematic ETFs, both passive and active, which focus on environmental, social and governance issues, especially climate change, as well as other investment themes.
Such ETFs have performed as well or better than traditional funds, which is why they’re attracting more investor interest.
“We’re starting to see investors become more comfortable using ESG funds as core products,” said Todd Rosenbluth, senior director of ETF and mutual fund research at CFRA.
He cites two ESG-focused S&P 500 ETFs — Xtrackers SNPE and State Street Global Advisors’ EFIV — which have each outperformed the S&P 500 year-to-date.
That would be an understatement for ARK Investment Management’s active ETFs, which focus on different disruptive technologies. Its Genomic Revolution ETF (ARKG), Next Generation Internet ETF (ARKW) and Innovation ETF (ARKK) have each gained at least 150% YTD through Dec. 28.
Rosenbluth expects to see continuing demand for clean energy ETFs such as TAN [Invesco's Solar ETF], which has more than tripled in price this year, as the incoming Biden Administration focuses on fighting climate change.
He also foresees other thematic ETFs coming to market, ones “that can fit in with a slightly more normal environment as coronavirus vaccines are given.”
4. Fee Cuts
As in many previous years, 2021 is expected to be a year of declining ETF fees. “We will continue to see fee pressures,” said Johnson. “There are still some basis points [to cut] out there.”
Even before this year has ended, BlackRock announced fee cuts in four passive iShares ETFs ranging from one to seven basis points, effective Dec. 17.
The four ETFs are the iShares Core MSCI Emerging Markets ETF (IEMG), 0-5 Year TIPS Bond ETF (STIP), Core International Aggregate Bond ETF (IAGG) and International Dividend Growth ETF (IGRO).