Where ETFs Are Headed in 2019 -- Journal Report
07 Janeiro 2019 - 1:37AM
Dow Jones News
By Ari I. Weinberg
Despite all the bouts of volatility in stocks and bonds, the
rush of assets into exchange-traded funds continued apace in 2018.
Net flows for U.S. ETFs totaled $295 billion; $197 billion went to
stock funds and $99 billion to fixed-income funds, while $1 billion
came out of commodity, currency and real-estate funds.
Total U.S. ETF assets under management closed 2018 at roughly
$3.4 trillion, according to research firm XTF. That is still well
below the $18.7 trillion or so in mutual funds -- the older cousins
of ETFs -- but it is massive nonetheless.
While the torrid pace of new product launches continued, it was
a washout year for exchange-traded notes -- debt securities that
track indexes and trade similarly to stocks. Issuers launched 269
new products and closed 151. In April, investment bank Barclays
closed 50 ETNs, 16 of which had been replaced earlier in the
year.
Competition remained fierce among providers of exchange-traded
products as Vanguard Group dropped commissions for most ETFs on its
brokerage platform -- and the prospect of a 0% expense ratio for
ETFs looms large. Fidelity Investments launched a handful of no-fee
index mutual funds last August.
ETF assets at JPMorgan Chase & Co.'s J.P. Morgan Investment
Management surged to nearly $20 billion, thanks to $15 billion of
net flows to its ultrashort fixed-income offering and several
low-cost international index funds. But that is still a far cry
from the exchange-traded assets at BlackRock, with $1.3 trillion,
and Vanguard, with $856 billion.
Here are five trends to watch in 2019.
-- One rule to rule them all. ETF issuers will be on the lookout
for the release of a final new ETF rule from the Securities and
Exchange Commission. Proposed last summer after several false
starts over the years, the rule attempts to "level the playing
field," says Dave Nadig, managing director of ETF.com, a unit of
Cboe Global Holdings. "It's a good cleanup for the industry," he
adds. The rule, which Mr. Nadig expects will ultimately have little
visible impact on investors, would clear the way for more issuers
to create or redeem ETF shares in so-called custom baskets which
can help improve the efficiency and trading for an ETF,
particularly when there are changes in an index. Under the current
systems, whereby ETFs and asset managers are operating under
specific relief from the Investment Company Act of 1940, some
managers have more discretion than others regarding how the baskets
of holdings used to create and redeem index-tracking funds are
built. Some are required to fully replicate the ETF; others have
more discretion when needed.
-- Approaching the asymptote. The race to the bottom in fees on
individual ETF offerings will continue as the largest issuers and
asset managers, particularly those with significant brokerage,
advisory, risk-management and custody businesses, push on their
ability to "find revenue other ways," says Robert Tull, president
of Procure Holdings. "The economies of scale are massive." In fact,
72% of the assets in ETFs are held by funds with expense ratios
below 0.20%, capturing 95% of net flows in 2018, according to XTF.
While competition has been fierce for U.S. equity offerings, the
fee war has spread to international and fixed-income funds, as well
as specialty products such as gold funds and those targeting
investments on environmental, social and governance (ESG) factors.
Moreover, the pressure to cut advisory fees could re-emerge with
more investors evaluating robo advisers or similar low-cost
services at the major brokerage firms as well as all-in-one
products like the recently launched Trinity ETF from Cambria
Investments, says ETF.com's Mr. Nadig. BlackRock also offers a
suite of funds with investment allocations that match varying
levels of risk. These funds were launched in the depths of the
financial crisis and have attracted more interest (and assets) in
the past several months.
-- Stuck in the doldrums. For most investors, the benefits of
ETFs lie in the transparency of the offering and the ability to buy
or sell as needed during market hours. But with the flood of new
products, and less institutional support, more funds are wallowing
with low assets, according to Elisabeth Kashner, director of ETF
research at FactSet. Of ETFs launched from 2007 to 2016, 45% of
funds that failed to reach $50 million in assets by the end of
their first year on the market have since closed, and 30% are still
below $50 million in assets. While institutional investors have
more leverage to trade in and out of smaller funds, individual
investors and advisers will often find less liquidity and higher
trading spreads in smaller products.
-- A re-evaluation of factors and fundamentals. Last fall marked
the first true bout of volatility and drawdowns for most so-called
smart-beta ETFs -- index funds that focus on stock attributes such
as dividends, price momentum, value and size -- the bulk of which
were launched since 2010. This year could be a reckoning for more
marginal products, such as sector and geography factor funds as
well as multifactor products that "a lot of investors don't
understand very well, " says Jeff Tornehoj, director of fund
insights for Broadridge Financial in Denver. He expects that
investors big and small "will continue to be cautious and
deliberate in their uptake," especially as a lower-cost replacement
for actively managed equity mutual funds, which saw $182 billion in
withdrawals for the one-year period ended in November 2018,
according to Morningstar, compared with $76 billion in net new
assets for alternatively weighted equity ETFs, according to XTF.
(Moreover, actively managed ETFs saw $26 billion in new flows,
mostly to short-term fixed-income ETFs used as money-market
replacements.)
-- More closures, healthier issuers. "Competing with BlackRock
and Vanguard for core products will get even more challenging, but
there is significant room to differentiate with alternative
offerings," says Daniil Shapiro, associate director of product
development for Cerulli Associates. "The pace of issuance or
closures is not a barometer of the health of the business." Mr.
Shapiro sees differentiated products from smaller asset managers
such as VanEck and WisdomTree, insurance providers such as John
Hancock, and advisory firms, taking hold as ETF assets under
management march toward $17 trillion by 2030. Look for more
self-indexing, whereby an issuer is able to trim the cost of
licensing an index from S&P Dow Jones Indices, MSCI or FTSE
Russell, by building customized investments for institutional
investors.
Mr. Weinberg is a writer in Connecticut. He can be reached at
reports@wsj.com.
(END) Dow Jones Newswires
January 06, 2019 22:22 ET (03:22 GMT)
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