A decade of tremendous progress for ETFs and passive investing
Did you know that over the last 10 years Vanguard picked up 87% of new net assets (inflows) of mutual funds with about two-thirds going to its largest index funds?
The shift of investor money from active into passive funds has certainly contributed to a fundamental reshaping of the competitive asset management landscape and this trend is set to continue.
Now and then
| 2020 | 2009 | |
|---|---|---|
| Active mutual funds | 59% | 80% |
| Passive mutual funds | 20% | 10% |
| ETFs | 21% | 10% |
While active mutual funds still represent 59% of the market, their grip has weakened in favor of passive mutual funds and ETFs.
ETFs are now close to reaching one-third of mutual funds, with the latter themselves hitting a record of 16US$ trillion at global level. [1] What explains this ETF boom witnessed over the last decade? The answer: demand for cheap products.
Europe
While the US remains the global center of passive investing, the boom has also reached Europe as assets hit US$1 trillion. Why? It’s down to three main reasons: a fierce war on fees, the underperformance of many active managers, and good performance of stock markets that ETFs replicate.
Blackrock with its iShares is already a big winner in Europe, competing with other providers like DWS, Lyxor and Amundi. 126 new ETFs were launched in Europe in 2019 but many funds struggle to achieve profitability. More than 1,000 ETFs (roughly half of all ETFs in Europe) hold assets of less than US$50 million. [2]
ETFs in Luxembourg
Back in 2016 when I wrote “ETFs a rising star in the investment universe”, Luxembourg-domiciled ETFs represented 20% of the European market. Close to four years later, Luxembourg is still the second strongest domicile after Ireland and has succeeded to grow to 27% due to ETFs changing domicile from France to Luxembourg.
What does the future hold for ETFs?
ETF adoption across Europe is set to accelerate thanks to innovation, favorable regulatory changes, and the long-term benefits of low-cost investing specifically in low interest rate environments. By 2024 they could hit EUR2 trillion of assets. Actively managed ETFs remain a tiny slice of the market (1%) but are expected to drive further ETF growth. While Equity ETFs still dominate, Bond ETFs and ESG-focused ETFs are also growing fast. [3]
With increased interest in sustainable investing, the largest ETF providers are increasingly taking an active role (through voting and engagement) in the oversight of the companies they invest in. That said, stewardship approaches vary across providers (just take look at the different approaches taken by Blackrock and Fidelity). Regulation is likely to accelerate the development of disclosure best practice and harmonization. [4]
Is active management dead?
The use of index strategies has increased in recent years but institutional investors globally say that the importance of active equity strategies in their portfolios has not diminished. A survey of 200 institutional decision-makers shows a sustained commitment to active equity strategies, clear strategy preference and the power of two, the right combination of active and index equity strategies to meet investment outcomes.
What are investors willing to pay for? Trust and services. They are looking for well-managed, highly-responsive asset managers partners, with their top selection criteria including risk-management capabilities and access to new asset classes, markets or strategies. [5]
Predictions and the road ahead
While index funds and ETFs have had a huge run, active management is still prospering. If current trends continue, however, the future might look a little different. Active managers will have a significantly smaller market share in addition to facing continued pressure on fees and high expenses.
As a result, active asset management firms are expected to struggle. The best alpha producers will do well, but others will shrink in scale…and many will close. To survive in the face of passive management’s efficiency, active management has to perform in a way that cannot be replicated by passive products. The future of asset management depends on reconnecting the portfolio management business with the real economy. Simply put, Funding the economy is the way forward for active management in the long term. [6]
[1], [2] and [3] www.ignites.com
[4] www.weflive.com
[5] and [6] www.rankiapro.com
