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jobalertshopThe exchange-traded fund (ETF) industry is rapidly growing, with assets under management (AUM) reaching an all-time high of $5.5 trillion in 2020. As investors seek to diversify their portfolios and allocate to passive investment strategies, the use of ETFs continues to increase.
In this article, we will explore the top trends and predictions for ETFs in 2021 and beyond.
- Continued Growth in AUM
The growth of the ETF industry has been unstoppable and is expected to continue well into the future. In 2020 alone, a record $500 billion of net inflows was recorded from US-based ETFs. This exceptional growth is due to several factors, including investors’ easy access to low-cost investment strategies, increased market volatility due to the COVID-19 pandemic, and the expansion of the range of asset classes and segments available.
As investors become more comfortable with the use of ETFs, the industry is expected to continue to grow, with AUM expected to reach $10 trillion by 2025.
- Increased Transparency
In recent years, there has been a call for increased transparency in the ETF industry. In response, ETF providers have improved their efforts in providing transparency by making portfolio holdings, fees, and performance data more accessible to investors.
Furthermore, the Securities and Exchange Commission (SEC) has introduced new rules that require ETF providers to publish a basket of securities that will underpin their ETF. This move has significantly increased investors’ ability to access the underlying securities in ETFs and improve the overall transparency of the process.
- More Targeted and Specialized ETFs
Another trend likely to manifest in the ETF industry is an increase in the creation and development of specialized and targeted ETFs. Most new ETFs come up with unique, niche, and specific investment themes, offering investors exposure to niches within the market that were previously difficult to access.
In the foreseeable future, we expect to see more ETFs tailored to specific sectors, industries, and geographical locations globally, giving investors more choices to build their investment portfolios.
- Active ETFs Growth
ETFs have primarily been associated with passive investment strategies in the past. However, several financial asset managers such as T.Rowe Price, BlackRock, and American Century have launched actively managed ETFs.
Active ETFs come with many benefits, including active management, which enables ETF managers more flexibility to buy and sell stocks, making strategies more attuned to market changes and offer a high level of transparency and liquidity. Additionally, Active ETFs can be flexibly traded intraday, offering investors the ability to enter or exit their position in real-time.
- Expansion of ESG ETFs
The use of environmental, social, and governance (ESG) metrics has become increasingly important in investment decision-making in recent years. As a result, the ETF market has responded to this demand with a significant expansion of ESG ETFs, that are measuring the ESG impact of companies included in their portfolio.
In 2020, U.S.-based ESG ETFs brought in $51.1 billion in net inflows, nearly four times the $13.4 billion haul of 2019, according to data from Morningstar. This trend is set to continue in 2021 and beyond as companies worldwide continue to focus on sustainable practices and socially responsible investing.
- Overseas Expansion
The ETF market was previously dominated by North America, with the United States accounting for nearly 83% of the world’s total ETF AUM. However, this is changing. The industry is likely to move in the direction of a globalized market, with ETFs available for investors worldwide.
Currently, ETFs are available for various countries, currencies, and asset classes. However, in the future, we believe that more investors globally will be interested in acquiring ETFs of other regions to diversify their portfolios, especially as more investors seek exposure to emerging markets.
In conclusion, the ETF industry has revolutionized how investors invest and become the most preferred investment vehicle. Despite the economic challenges of the COVID-19 pandemic, the growth of the industry continues to surge, and it is expected to reach new heights in the coming years. With increased transparency, more specialized products, ESG-focused investing, and active ETFs’ growth, we are looking forward to a great year ahead for the exchange-traded fund industry.
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