Every year we lay out our predictions of key ETF (exchange-traded fund) trends to watch. However, before doing that, we always like to reveal whether our predictions from the prior year came true. The three trends we identified at the beginning of 2021 follow.

  1. Buyers will favor US equity-focused ETFs over international equity ETFs.
  2. Buyers will favor high quality fixed income ETFs over junk bond ETFs.
  3. ESG (environmental, social, and governance) ETFs will have their biggest sales year ever.
Let’s look at how accurate our 2021 trend predictions were.

2021 Trend #1 – Buyers will favor US-focused ETFs over international ETFs.
Per Strategic Insight Simfund, US equity ETFs have gathered $217B in net flows through August 2021, while international equity ETFs have attracted only $119B in net flows.

2021 Trend #2 – Buyers will favor high quality bond ETFs over junk bond ETFs.
In looking at the Morningstar fixed income category net flows for the year to date through August, high yield has suffered net outflows. In contrast, 18 of the 20 other (non-high yield) fixed income taxable bond categories have seen positive net flows. In total, these other fixed income categories gathered about $124B in net flows, while the Morningstar High Yield category lost about $1B in net flows. This prediction also looks to be on target as investors are favoring higher quality bonds in 2021.

2021 Trend #3 – ESG ETFs will have their biggest sales year ever.
ESG has been an omnipresent market theme in 2021. Net sales in ESG ETFs are $112B through August 2021, per FUSE and Morningstar. Through just 8 months of the year, this figure already exceeds any prior year in history (full year 2020 was only $74B). Watch for continued investor interest, many more ESG ETF launches, and net flows in the coming years.

Now let’s review our trend predictions for 2022.

2022 Trend #1 – We will see a cryptocurrency ETF launch.
With the increased investor interest in cryptocurrency, and some nations around the world (including Canada) allowing these products to launch, we expect US regulators to build an oversight framework that will allow for cryptocurrency ETFs. Speculation is that the first wave of ETFs will use options to gain cryptocurrency exposure, rather than direct ownership of cryptocurrency. Expect to see a passive Bitcoin, a passive Ethereum, and maybe an active diversified cryptocurrency ETF. Over the long term, we expect investors to treat cryptocurrency products similarly to any other investment choice within the liquid alternative bucket of their portfolios.

2022 Trend #2 – ETFs’ tax-efficiency will remain unchanged.
There’s been speculation that the US Congress may eliminate the ability for ETFs to utilize the creation and redemption process to minimize taxes for ETF investors. As certain members of Congress look for ways to pay for their infrastructure bill, they see eliminating the ETF tax benefit as a great revenue generator. While this may be true, it would also mean higher taxes on everyday working Americans. 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. We expect Congress will find other sources of funds to pay for their infrastructure bill.

2022 Trend #3 – Active ETF assets will double from year-end 2020’s level.
Active ETF assets were about $200B at the end of 2020. We think this asset level will reach $400B by the end of 2022. There are three factors driving the increased interest in active ETFs: increased market volatility, active semi-transparent ETFs becoming more widely adopted, and mutual fund to ETF conversions continuing.

  • First, the increase in market volatility is leading some investors to look for actively managed rather than passively managed ETFs. The reason is that they hope active managers will be able to better mitigate volatility and downside risk.
  • Secondly, active semi-transparent ETFs first launched in 2020 and have already driven notable assets into the active ETF space. 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.
  • Thirdly, in 2021 the first mutual fund to ETF conversions were approved by the SEC and in fact completed. These conversions allowed issuers to enter the ETF market with size and an existing track record. We think this trend will continue, and when combined with more active semi-transparent ETF launches and active ETFs being favored by investors amidst higher market volatility, active ETF assets should rise.
We look forward to checking in with you next year to review how accurate our 2022 predictions were.
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Options: An option is a contract giving the buyer the right - but not the obligation - to buy (in the case of a call) or sell (in the case of a put) the underlying asset at a specific price on or before a certain date. Investors use options for income, to speculate, and to hedge risk.

Options may be used for hedging purposes, but also entail risks related to liquidity, market conditions and credit that may increase volatility. The value of the fund's positions in options may fluctuate in response to changes in the value of the underlying asset. Selling call options may limit returns in a rising market.

Cryptocurrencies: A digital currency in which transactions are verified and records maintained by a decentralized system using cryptography, rather than by a centralized authority.

Cryptocurrencies are subject to numerous market risks, they are speculative and volatile, can become illiquid at any time, and are for investors who can tolerate the full loss of their investment.

An exchange-traded fund, or ETF, is a marketable security that tracks an index, commodity, bond, or a basket of assets like an index fund. ETFs trade like common stock on a stock exchange and experience price fluctuations throughout the day as they are bought and sold. Short-term fixed income ETFs invest in fixed income securities with durations between one and five years.

All investing involves risk, including the risk of loss. Investment risk exists with equity, fixed income, money market, and alternative investments. There is no assurance that any investment will meet its performance objectives or that losses will be avoided.

The views and opinions expressed may change based on market and other conditions. This material is provided for informational purposes only and should not be construed as investment advice. There can be no assurance that developments will transpire as forecasted. Actual results may vary.

Unlike passive investments, there are no indexes that an active investment attempts to track or replicate. Thus, the ability of an active investment to achieve its objectives will depend on the effectiveness of the investment manager.

Diversification does not guarantee a profit or protect against a loss. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Asset allocation does not ensure a profit or protect against loss.

ETF General Risk: ETFs trade like stocks, are subject to investment risk, and will fluctuate in market value. Unlike mutual funds, ETF shares are not individually redeemable directly with the Fund, and are bought and sold on the secondary market at market price, which may be higher or lower than the ETF's net asset value (NAV). Transactions in shares of ETFs will result in brokerage commissions, which will reduce returns. Active ETF: Unlike typical exchange-traded funds, there are no indexes that the Fund attempts to track or replicate. Thus, the ability of the Fund to achieve its objectives will depend on the effectiveness of the portfolio manager. There is no assurance that the investment process will consistently lead to successful investing. Fixed Income Securities Risk: Fixed income securities may carry one or more of the following risks: credit, interest rate (as interest rates rise bond prices usually fall), inflation, and liquidity. Below Investment Grade Securities Risk: Below investment grade fixed income securities may be subject to greater risks (including the risk of default) than other fixed income securities. Foreign and Emerging Market Securities Risk: Foreign and emerging market securities may be subject to greater political, economic, environmental, credit, currency, and information risks. Foreign securities may be subject to higher volatility than US securities, due to varying degrees of regulation and limited liquidity. These risks are magnified in emerging markets. Interest Rate Risk: Interest rate risk is a major risk to all bondholders. As rates rise, existing bonds that offer a lower rate of return decline in value because newly issued bonds that pay higher rates are more attractive to investors.

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