The ETF boom continues with socially responsible investing and active management

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On the surface, the story of exchange-traded fund growth continues: U.S. ETF activity ended 2019 with $ 4.4 trillion in assets under management, a 30% increase from 2018, according to etf.com. The number of ETFs also increased by 8% to 2,302.

Thanks to the continued growth of two hot trends – environmental, social and governance, or ESG, and active management – growth will continue into 2020 and beyond, but not without challenges.

Here are five of the hottest topics from this year’s Inside ETF conference:

1) ESG: It finally counts. 2019 was the first year that investors stopped talking about environmental, social and governance investing and finally put money into them. It’s still small: ESG funds represent just $ 20.9 billion in ETF assets under management, or about 0.4% of the roughly $ 4.5 trillion that the industry as a whole controls.

This will increase dramatically in 2020. Blackrock’s Larry Fink wrote a passionate letter saying it was time to take climate change (and ESG) seriously, and it seems to have finally pushed the conversation above.

One problem: ESG is inherently non-scalable. “My ESG is not your ESG is not my neighbor’s ESG,” said Ben Johnson of Morningstar.

Even the Securities and Exchange Commission seems to agree: the agency asked ESG providers for more information on how they define exactly what ESG is. One solution to the confusion may be direct indexing, which would allow individual investors to customize portfolios to meet the criteria they want.

2) More active management: Several mutual fund companies have applied for the right to convert existing actively managed funds into an ETF envelope. Like their mutual fund counterparts, they do not disclose their holdings on a daily basis (hence “non-transparent”). The objections are obvious: If you’re an active, underperforming mutual fund manager, you’re not going to be suddenly successful if you switch to an ETF wrapper. You are always pathetic.

Either way, active managers always have followers, and if the best can switch to a cheaper, more tax-efficient ETF wrapper, it will attract more money into the ETF space.

Expect American Century, T. Rowe Price, and Legg Mason to be some of the first launches in 2020.

3) Thematic ETFs: What’s the next pot craze? Everyone loves thematic investments, until they don’t. Cannabis, cybersecurity, immunotherapy, blockchain, 5G, artificial intelligence, and even space exploration have been hot topics in the past. And then passed out.

This tells us that the timing of those launches is of critical importance. Too soon, and you could languish for a long time. Too late, and you miss significant asset growth at the start of the fund’s life.

Exclude old favorites. “The cannabis industry is not going to go away,” said Tom Lydon of ETFTrends.com. “ETFs on cannabis and cannabis stocks are half what they were a year ago. As more states legalize marijuana and the Fed authorizes a suitable bank, we’ll see more assets flowing into these ETFs. “

And in the “hope never dies” category: will 2020 finally be the year of the SEC’s approval of a bitcoin ETF? My guess: don’t bet on it.

4) The cost war continues, but the impact is diminishing: 2019 saw a “race to zero” as the biggest ETF providers cut fees to the bone. This will continue in 2020.

“It’s not just about management fees going down to zero anymore; it’s now about EVERYTHING going down to zero,” Matt Hougan of Bitwise Investments told me, noting that not only have trading commissions fallen to zero. zero, but advisor and platform custody fees have gone down. And you can get investment advice for less, too: Vanguard’s personal advisor services have reached over $ 100 billion and offer advice for pennies on the dollar, Hougan noted.

5) Consolidate or close? The race for zero fees produces some big winners and many more left behind. There are 141 ETF providers, but the five largest companies (Blackrock, Vanguard, State Street, Invesco and Schwab) control 91% of the assets. Wisdom Tree (WETF), one of the few pure ETF public games, is at 85% of its all-time high in 2015 and is now near its 10-year low.

Consolidation has been expected for years, but buying low asset ETFs doesn’t necessarily lead to scale efficiency: “There are fewer and fewer attractive dance partners every day,” said Ben Johnson , Director of Global ETF Research at Morningstar.

Either way, someone is likely to try their luck in the consolidation game.

John Davi, founder and CIO of Astoria Portfolio Advisors, has an intriguing idea. “Private equity funds could come in and buy 10-20 ETF issuers with the idea of ​​monetizing the ETF ecosystem,” he said.

He estimated that there was already a ton of money pouring into private equity funds to buy dental offices, plumbing companies and taxi medallions. Why not ETFs?


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