Global ETF Market Continues Rapid Growth

Global ETF Market Continues Rapid Growth

The benefits of Exchange Traded Funds (ETF’s) are well known and include greater transparency for investors of the underlying investments, typically lower cost than the equivalent mutual fund strategies and risk diversification which allow investors take exposure to a basket of securities or sector of the market through a single ETF share. An ETF trades like an equity but provides all the underlying benefits of a mutual fund.

The global ETF market experienced significant growth in 2020 with record inflows of circa US$750bn bringing the total level of assets invested in global ETF funds to US$7.74 trillion, an increase of 26% from a total of US$6.12 trillion invested at the end of 2019 (Source ETFGI). To the end of February 2021 ETF’s have seen further growth in assets of circa 5% to US$8.07 trillion representing a growth of 138% over the past 5 years from 2016 levels.

For the second year in a row we also saw US Fixed Income ETF inflows outstripping those of US equity ETF inflows. Interestingly these funds continued to perform extremely well in times of high volatility and market turbulence in March 2020 where they saw good liquidity levels, good price transparency levels and significantly lower costs than individual bond holdings experienced. The continued efficiency and the performance of ETF’s more generally in volatile markets should help contribute to the debate about the systemic importance of ETF’s particularly in Europe where there is still some reservations around the potential for disruption to markets from the volume and concentration of ETF assets.

2020 has seen a further evolution of the ETF active strategy market particularly in the US and Australia where the emergence of Smart-Beta and active ETF’s has dominated the new product landscape. 2020 saw a 71% increase in the number of active ETF’s in the US. This followed a change to the SEC rule 6c11 which was designed to modernise the regulation of US ETF’s and to create a clear and consistent framework for all ETF’s in operation, a recognition of the changing nature of the products and a requirement to evolve the regulatory framework in line with market changes. This change, the first real change to ETF specific regulation is seen as a recognition of the contribution of ETF’s to the goals of US investors since their introduction in the mid-1990s.

Since the 6c-11 rule change and the SEC approval for active ETF funds, we have seen a number of active semi-transparent ETFs being launched by some of the world’s biggest mutual fund houses. These include Fidelity, T Rowe Price, Invesco and Legg Mason to name a few, many of which replicate the strategies of existing mutual funds but with a significantly more competitive fee structure. These funds have also raised over US$1 billion of inflows in a relatively short time period. In other US market developments, there has also been a move by some mutual fund houses to convert mutual funds into ETF structures, the latest announced by Dimensional Fund Advisors at the end of 2020 planning to convert a mutual fund range with US$26 billion of assets into ETF’s.

Looking ahead the future seems extremely bright for the ETF industry but maintaining investor transparency and understanding will be the key to future success. Asset managers have rarely had as many options to meet investor demands with a wide range of product options however maintaining the positive growth trend will require continued close collaboration from industry participants, regulators and policy makers to ensure that ETF regulation is keeping pace with the level of change in both product innovation and investor demand while continuing to meet high levels of transparency and investor protection.

Fearghal Woods, Global Head of ETFs, JP Morgan Fund Services

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