Nobody can dispute that 2017 was a big year for ETFs with record inflows, pushing global assets to break the £3 trillion mark.
Next year industry experts expect another stellar period of expansion. But asset growth aside, speakers at the recent Inside ETFs Europe conference also anticipates four other trends. Hedre they are:
1. ESG will start to go mainstream
There only are 36 ‘socially conscious’ different ETFs listed in Europe with total assets of around £4.7 billion, according to Morningstar, although providers like iShares have recently added to their ranges.
Yet Nicco Ferrarini, executive director, EMEA client coverage, MSCI, said environmental, social and governance-focused ETFs would become the new normal within a decade.
‘There is mounting evidence that ESG can add to the performance of your portfolio in terms of risk mitigation,’ he said. ‘The ‘G’ in ESG – governance – has really helped protect you from the worst corporate scandals in the last few years, like BP’s oil spill, or Valeant’s accounting scandal, or the Volkswagen emissions cover-up or the Equifax data leak.’
He added: ‘I’m not suggesting indexes can forecast every corporate scandal out there but if it can forecast 20-30% of them investors will benefit.’
Ferrarini pointed out that millennials are much more likely to want ESG funds in their portfolios, as it ‘feels good and has a wow factor’.
ESG funds in Europe are gathering pace, with the iShares Dow Jones Europe Sustainability Screened UCITS ETF (IESE LN) gaining £89 million in September alone.
2. New entrants
Several asset managers in the UK have expanded into ETFs this year, such as JP Morgan Asset Management, Franklin Templeton Investments and Fidelity International, while providers in the US like First Trust have recently entered European waters.
Ferrarini said this trend was likely to continue, particularly from providers in the US.
He warned: ‘We will always have this problem of fragmentation in Europe and it’s not always understood by new entrants. Some will be successful but the key for them is to find niche parts of the market, as other parts of the market today appear quite saturated.’
3. More fixed income and smart beta
Inflows into Europe-listed smart beta ETFs reached £8.2 billion this year to the end of September, Deutsche Bank found, and most providers continue to build up their own suites of factor ETFs.
Mohamed M’Rabti, deputy head of FundsPlace and head of ETFs, Euroclear, said there was still a question mark whether smart beta would become mainstream, but said there was room to grow in fixed income.
‘If you look at what was offered 10 years ago you had govvies, corporate and high yield bonds and so-called ‘all maturities’ products, whereas now we have more granular products as the market has completely changed,’ he said. ‘That will be the future of not just ETFs but of the market as a whole.’
Hortense Bioy, director, passive funds research, Morningstar, said she expects to see more thematic ETFs used as satellite holdings.
‘I think we’ve covered the core in terms of portfolios building blocks and around that we will see more fringe or niche products,’ she said.
4. MiFID II will drive more investors towards ETFs
After years of discussion, the pan-European Markets in Financial Instruments Directive (MiFID II) is coming into force in January 2018.
‘MiFID II will put more focus on cost,’ said Matthieu Guignard, global head of product development and capital markets, Amundi ETF, indexing and smart beta. And that will push more distributors to use low-cost bricks for their allocation.’
MiFID II also provides more transparency as it requires investors to report transactions including over the counter trades.
‘This will show the true volume and liquidity of products, and that is positive as it will boost investors’ confidence in ETFs,’ he said.