The year of ETFs: active management, ESG and crypto


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Christmas decorations in front of the New York Stock Exchange (NYSE) in New York, United States, Monday, December 13, 2021.

Michael Nagle / Bloomberg

We are closing another banner year for the fund industry, which has seen record asset flows, unique products and a growing interest in actively managed and sustainability-focused strategies.

Exchange-traded funds continued their momentum, raising more than $ 900 billion in new money with two weeks remaining in the year, shattering last year’s record of $ 500 billion in net inflows. Almost 450 new ETFs were launched in the past year, which also set a record and marked the second year in a row that more new ETFs were launched than mutual funds.

The ETF industry has reached $ 7 trillion, still less than the $ 20 trillion in mutual funds, but catching up seems inevitable. This year we saw the very first mutual fund to ETF conversion, first from Guinness Atkinson and Dimensional Fund Advisors, followed by JPMorgan and Franklin Templeton announcing similar plans for 2022.

Yet in at least one way, the ETF industry increasingly resembles the mutual fund industry: It embraces active management. The combined forces of regulatory changes, a volatile market (which apparently offers more opportunities for stock pickers) and the exceptional success of ARK Invest’s Cathie Wood last year, ushered in a new era of managed ETFs. active. Of the 450 ETFs launched in 2021, nearly two-thirds are actively managed, including some from mutual fund giants that missed the first wave of the ETF boom, such as T. Rowe Price, Capital Group and American Century.

The rise of memes stocks has led to new funds that choose stocks based on social media sentiment or high short-term interest, while others aim to take advantage of emerging trends like the metaverse and non-fungible tokens.

Most notably, investors adopted the first Bitcoin-linked ETFs. This marks the admission of cryptocurrencies into traditional portfolio management and allows investors to have a stake in


alongside their stocks and bonds, without having to manage wallets and digital keys. Although US regulators have only authorized ETFs that track Bitcoin futures contracts, investors have not been deterred: the former,

Bitcoin ProShares Strategy

The ETF (ticker: BITO) attracted $ 1.2 billion in new assets in just three days after launch. The first-mover advantage clearly matters here: Two more have since been launched, but only have $ 73 million in combined assets.

One of the biggest hits of 2020 has seen one of the biggest setbacks this year. Cathie Wood’s ARK Invest innovation-driven ETFs performed the best last year, averaging over 150% return. But funds have struggled since the February peak and lost much of those gains as rising inflation makes the future cash flows of growth companies owned by ARK less valuable today. Five of ARK’s six actively managed ETFs are in negative territory for the year. Last year’s best performance is this year’s worst—

ARK Genomic Revolution

(ARKG) tumbled 31%.

Meanwhile, as supply chain disruptions strike, the $ 56 million

Breakwave Dry Bulk Shipping

ETF (BDRY), which tracks the charter rate for dry bulk transport, has jumped 246% year-to-date to become the top performer this year. As commodity prices have risen, funds investing in energy companies and miners have also been among the biggest gainers this year.

The rise of funds with environmental, social and governance, or ESG, mandates has not slowed in 2021. Companies and investors are increasingly aware of the financial risks of poor employee management, a lack of diverse leadership and a negative environmental impact.

According to Morningstar, funds with sustainability mandates listed in their prospectuses attracted $ 68 billion in new assets in the first 11 months of 2021. This is significantly higher than the $ 51 billion in net flows in 2020. , more than double the total for 2019 and almost 10 times more than in 2018. The pace of adoption could accelerate even more, as ESG funds could become an option in 401 (k) pension plans of many people next year.

The growth of ESG funds has manifested itself not only in the record number of new products and assets from investors, but also in various emerging strategies. Some funds, for example, directly offset the carbon emissions for which their portfolio companies are responsible by investing in projects that prevent the release, reduce or eliminate greenhouse gas emissions.

Yet another new effort:

Engine n ° 1 Transform 500

(VOTE), launched this summer, has a portfolio very similar to that

S&P 500

index, but is distinguished by its explicit mandate to push ESG changes in the companies it owns. The fund’s sponsor, activist asset manager Engine No. 1, had successfully won three seats on the board of directors of

Exxon Mobil

(XOM) in a proxy fight in an effort to help the oil giant switch to cleaner energy. The company is advocating a new way of investing in ESG: instead of getting rid of “bad players”, own their shares and make a difference through shareholder rights.

KraneShares Global Carbon
(KRBN) invests in carbon credit futures, which have become tradable assets as many countries and regions limit the amount of carbon dioxide companies can emit. Companies that exceed the threshold must purchase additional permits from those with a remaining quota. As caps are expected to decrease over time, carbon prices are expected to rise and ultimately push companies to pollute less. The KraneShares fund is one of the best performing ETFs of 2021, rising 88% since the start of the year.

Write to Evie Liu at [email protected]

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