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December 28, 2023 at 04:42 PM
What You Need to Know
- Broad market-cap-weighted vehicles remain the most popular, with other styles quickly gaining momentum.
- Among the biggest stories will be the launch (or rejection) of the industry’s first spot bitcoin exchange-traded funds.
- Elsewhere, stocks that focus on value, quality and dividends figure to be more relevant in the coming year.
The exchange-treaded fund market will soon be 30 years old, and 2024 could represent one of the most dynamic years yet for the investment vehicle, according to Todd Rosenbluth, head of research at VettaFi.
Rosenbluth spoke with ThinkAdvisor about this and other big market trends ahead of the firm’s upcoming Exchange conference, which begins Feb. 11 in Miami.
As Rosenbluth explained, the goal of the conference, for many advisors, will be getting up to speed on what has happened in the ETF space in recent years — along with gaining insights about the markets in general for 2024 and enjoying a healthy dose of fun and networking, too.
According to Rosenbluth, the start of 2024 represents an exciting time in the ETF industry, both from a market performance and a competitive standpoint. As of the time of the conversation in mid-December, two ETFs stood above the rest. These were the Vanguard S&P 500 ETF, which hoovered in $39.5 billion of new money in 2023, per VettaFi’s LOGICLY data, and right behind was the iShares Core S&P 500 ETF, which gathered $35.4 billion.
As Rosenbluth noted, both ETFs have a “miniscule fee” of 0.03% and are supporting many advisors allocating for 2024. Meanwhile, the SPDR S&P 500 ETF pulled in $13 billion, and its institutional appeal could help it narrow the gap next year. While broad market-cap-weighted ETFs were most popular, there were some smart beta ETFs gaining traction in 2023, and new active funds also saw burgeoning interest.
Looking to 2024, (some) investors are also awaiting the launch (or SEC rejection) of the industry’s first spot bitcoin ETFs, and there are big questions about how the U.S. and global economies may fare as interest rates either remain higher or begin to fall throughout the year.
Ultimately, 2024 is likely to represent one of the most interesting years for ETFs since their inception, Rosenbluth suggests, and it is beholden on advisors to keep abreast of all the changes.
Here are highlights of our conversation:
THINKADVISOR: What do you make of the very strong performance posted by some ETF managers in 2023? Some funds even beat the S&P 500. Was this a surprise to see?
Todd Rosenbluth: So, the first thing to say is that 2023 has been a year when higher quality investments have done relatively well, and despite the stock market being up in general, there’s a lot of uncertainty within certain sectors.
As we have had rising interest rates throughout the year, we have also had slower earnings trends, and so that has propelled the performance in higher quality investments. Those companies that have strong balance sheets, consistent cash flow and consistent earnings records have done relatively well this year.
We have seen very good performance among funds with this kind of a focus — with a high quality approach.
Something that has been exciting to see is how different asset managers are coming into the space, including managers who are bringing more active management. It’s still early days for actively manage ETFs, but advisors have been turning to active management for years.
They now have more choices in an ETF structure, and it’s great to have players like GMO or DoubleLine bringing their best investment ideas into the ETF world.
Where does the ETF industry stand today with respective to the use of active versus passive management?
So, roughly 5% of assets in the ETF market, in terms of assets under management, are currently actively managed. The rest track an index or are spot ETFs that track commodities like gold or specific sectors.
However, we saw about 25% of the money that has gone into ETFs in 2023 going into actively managed ETFs. So, actively managed funds have been punching above their weight in terms of inflows.
In general, investors are turning to them. Many advisors have believed in active management for years, but they have used mutual funds as the way of getting that exposure. As model portfolios have become more prevalent, and now that active ETFs have become more prevalent, we are clearly seeing greater adoption of active ETFs, including in model portfolios.
