By David Mann, Head of Capital Markets, Global Exchange-Traded Funds (ETFs), Franklin Templeton Investments
Before getting into my predictions for 2019, I need to have some honest reflection on how I did last year. Let’s recap my 2018 predictions and give myself a grade on each.
1. Active equity ETFs will make a surprising asset leap
Grade: B-
On the one hand, I was right about the increased adoption of active ETFs. Last year, we saw $14 billion go into active ETFs, and this year we just crossed the $25bln mark.1 Nice!
However, of those $25bln of inflows, only a little more than $3bln went into active equity ETFs. That is actually down from the $4bln of inflows last year.2 Active fixed income ETFs earned the lion’s share of inflows in 2018, at almost $20bln.3
The total assets under management (AUM) of active ETFs is now almost $70bln, with most of that in fixed income.4 Maybe people are starting to appreciate the flaws with indexed fixed income ETFs?
2. The interest in low-cost passive ETFs is not going to change.
Grade: A
I do not see this trend of investors looking to get low-cost exposure to a particular market changing any time soon. These stats from Bloomberg, (as of 11/23/18) seem to confirm this view:
Average management fee of the top 10 ETFs in terms of inflows: nine basis points5
Average management fee of the top 10 ETFs in terms of outflows: 35 basis points
3. More niche areas
Grade: B
In 2018, there were more than 200 ETFs brought to market. Many of them were incredibly specialized thematic plays, so it is true that we saw more niche areas. However, I didn’t give myself an A on this, because not many of those attracted significant assets. That said, I will most likely revisit this theme next year, considering the time it usually takes for an ETF to gain acceptance. We may very well see things change.
4. Possible ETF-related regulations
Grade: A
This one was an easy A, because we have a proposed ETF rule! I blogged about it! And, Franklin Templeton has a comment letter! I was tempted to knock myself a half grade considering this was a repeat prediction, but it’s been a long time coming, and finally gained traction in 2018.
Overall: Not too bad!!
Stay tuned for my predictions for 2019 in an upcoming post.
David Mann’s comments, opinions and analyses expressed herein are for informational purposes only and should not be considered individual investment advice or recommendations to invest in any security or to adopt any investment strategy. Because market and economic conditions are subject to rapid change, comments, opinions and analyses are rendered as of the date of the posting and may change without notice. The material is not intended as a complete analysis of every material fact regarding any country, region, market, industry, investment or strategy.
This information is intended for US residents only.
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What are the Risks?
All investments involve risks, including possible loss of principal. Brokerage commissions and ETF expenses will reduce returns. ETF shares may be bought or sold throughout the day at their market price on the exchange on which they are listed. ETFs trade like stocks, fluctuate in market value and may trade above or below the ETF’s net asset value. However, there can be no guarantee that an active trading market for ETF shares will be developed or maintained or that their listing will continue or remain unchanged. While the shares of ETFs are tradable on secondary markets, they may not readily trade in all market conditions and may trade at significant discounts in periods of market stress.
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1. Source: Source, Bloomberg, as of November 23, 2018.
2. Source: Ibid.
3. Source: Ibid.
4. Source: Ibid
5. Source: A basis point is a unit of measurement that conveys changes in value or rate of a financial instrument. One basis point is equal to 0.01%.