Closing out the year amidst market turbulence and uncertainty, fears about a new COVID variant, more aggressive Fed tapering, and interest rate raises potentially on the horizon have many investors questioning what 2022 will bring. One active management firm recently gave their forecast for the ETF industry for the next year, including thoughts on tax legislation regarding ETFs, cryptocurrency ETF possibilities, and the growth of active ETFs.
A recent write-up by Nicholas J. Elward, senior VP and head of institutional product and ETFs at Natixis Investment Managers, discusses his predictions for 2022.
Elward believes that the tax efficiency will remain the same for ETFs, despite speculation and concern that Congress might pass legislation that would get rid of the creation and redemption process for ETFs. This was most prominent when Congress was working on passing the infrastructure bill, since they were considering eliminating the tax-saving feature from ETFs to help generate more revenue to fund the bill.
“Upon taking office, President Biden pledged not to raise taxes on Americans earning less than $400,000 per year. In direct contrast to that pledge, eliminating ETFs’ tax-efficiency would effectively raise taxes on millions of middle-class Americans,” Elward writes.
With more countries adopting spot cryptocurrency ETFs, and growing interest from investors, Elward believes that regulators within the U.S. will work to create a framework allowing for a cryptocurrency ETF. He predicted that the first wave will be options-based exposure, which has since been approved, and that this will be followed by a passive ethereum, passive bitcoin, and potentially an active diversified cryptocurrency ETF.
Third, Elward foresees active ETF assets doubling from 2020’s year-end numbers, roughly $200 billion. By the end of 2022, Elward firmly believes that active ETFs will have reached $400 billion in assets. Three factors are expected to contribute to this growth: market volatility, semitransparent active ETFs being used more broadly, and mutual fund to ETF conversions continuing to grow.
Investors are leaning more into active funds as market volatility picks up, hoping that they can navigate and help mitigate downside risk. With interest rate increases on the horizon, the Fed indicating that bond tapering might happen faster, and a new COVID variant at play, markets have been choppy, and the uncertainty is expected to continue. Active managers have an opportunity to shine in these environments, being able to better control exposures than can a passive benchmark that must ride out the volatility storm.
The launch of active semi-transparent ETFs in 2020 has led to a new wave of investors and fund managers in the space, as well as a flood of inflows for active funds.
“Active semi-transparent ETFs are an enhancement to the existing ETF chassis that frees portfolio managers from having to disclose their holdings daily; instead, they provide other daily portfolio information. With this enhancement, more active portfolio managers are willing to run ETFs, knowing that their stock picks won’t be front-run or free-ridden by predatory investors,” Elward explains.
Mutual fund conversions to ETFs were first approved this year by the SEC and allow for mutual fund managers to transfer over existing strategies and their track records into the ETF vehicle, which is generally more appealing to investors for its tax efficiency. It’s a trend that Elward sees continuing through next year, and the combination of active semi-transparent ETFs and mutual fund conversions should drive much higher investment into active ETFs in 2022.
Active management is poised favorably moving into next year. T. Rowe Price, an active management firm, currently offers eight actively managed ETFs with a variety of strategies for investors to align their risk exposures and investment goals.
The firm brings a bevy of experience and research to its products, with portfolio managers averaging over 20 years in investing each, as well as over 400 investment professionals dedicated to researching companies within ETFs.
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