After another year of impressive growth for the European ETF industry – assets reached $ 1.5 billion at the end of 2021 – it’s easy to anticipate another record-breaking year of gains by 2022.
However, beyond the headlines, several key themes have emerged over the past 12 months that may well shape the industry over the next year or so.
Many of these trends are in their infancy, while for some it is a perpetual debate, but all are likely to cross paths with investors at some point in the near future.
With that in mind, here are the top five ETF trends to watch in 2022.
1. Direct indexing
There was some surprise and dismay within the investment industry when Prince Harry and Meghan announced they would be joining ethical direct index manager Ethic in October of last year.
Although pioneers in their own right, the asset management giants have long been intrigued by direct indexing and have sucked platforms left, right and center in an effort to shorten their path to owning the complex technology involved.
Direct indexing means that a portfolio can be fully personalized according to the client’s preferences, for example by excluding stocks that contribute to global warming or by prioritizing high-quality national champions.
It is hailed as the next frontier of asset management by some, investors are also able to access certain benefits such as reducing tax obligations or removing overlapping exposure to large equity positions. held elsewhere.
However, detractors are wary of a product that is essentially active management by the end investor, a job in which many professional fund managers fail to benchmark.
Whatever your opinion, consultancy firm Cerulli Associates has predicted that direct indexing will increase at an annual rate of over 12% over the next five years, exceeding the expected growth for ETFs and other investment vehicles, so expect to see a lot more activity in this space for 2022 and beyond.
2. Common ownership
Like the dark clouds building in the distance, common ownership issues between the âbig threeâ vendors – BlackRock, Vanguard, and State Street Global Advisors – have the potential to create big problems in the years to come. to come.
More than in 2022, it has been dubbed the ‘defining battleground’ for the ETF industry over the next decade, in which the ‘big three’ could hold up to 33% of shareholders’ votes. by 2032 on the current trajectory of asset collection, compared to around 20% today.
John Coates of Harvard Law School, in an article titled The twelve problem, said it could produce the greatest concentration of economic control in our lifetime.
BlackRock has taken steps to address the issue by offering asset owners in 40% of its $ 4.8 billion equity index funds the ability to vote directly with the companies, instead of the company participating. itself, but a lack of transparency on the owner of the ETF, due to secondary market trading means that problems persist.
The âbig threeâ will likely have to take action to prevent future regulations limiting their ownership and 2022 could see action taken in this area.
The defining characteristic for many investors this year will be their inflation outlook.
The debate over whether the recent spike in inflation – which reached its highest level since 1982 in late November – is transitory or here to last is likely to linger long into the new year.
A recent survey conducted by ETF flows and Amundi highlighted how controversial the subject is, with 44% deeming it âtransitoryâ while 41% anticipating regime change. Additionally, 81% said inflation will dominate the market outlook in 2022.
Investors will base much of their asset allocation decisions on where inflation lands over the next year, with a spike forcing central banks to tighten monetary policy faster than market expectations. , while lack of action could cause savings to overheat.
Higher-than-expected inflation could trigger a massive sell-off of bonds, especially longer-dated government bonds, which are more sensitive to interest rate changes than corporate bonds.
If inflation persists, we can expect flows to continue to move into commodity ETFs, ultra-short bond ETFs, and the traditional safe haven hedge of gold ETFs.
4. Regulation: SFDR, CSDR and consolidated band
Despite moving targets and postponing the implementation of phase two of the Sustainable Finance Disclosure Regulation (SFDR) – this time until January 2023 – asset managers across Europe will prepare with notoriously complex regulations.
Some of the largest European asset managers have already positioned themselves, as well as their product ranges, to be labeled Article 8 or 9 of the SFDR, taking up the commercial advantage of the labels.
Despite this, the detailed rules for the taxonomy selection criteria – also slated for January 2023 – will mean asset managers will need to back up these claims with evidence, while it is not incomprehensible that further adjustments to the taxonomy SFDR will be implemented.
A more imminent piece of regulation for the ETF industry is the rollout of central securities depository settlement (CDSR) scheduled for February, aimed at streamlining settlement standards across Europe.
It is hoped that the regulation will bring further harmonization for UCITS ETFs through the implementation of common features.
Also, expect to hear more about the introduction of Consolidated Band in Europe, following the publication of the European Commission’s plan to introduce the mechanism in November. The long-awaited reforms will provide data on stock transactions “as close as possible to real time”, seen as crucial for the next phase of ETF growth in the region.
5. Emphasize the “S” in ESG
Last year has been another important year for ESG investing, as around half of the flows have accumulated in ESG ETFs. However, a large portion of the flows were destined for environment-focused ETFs with many new launches targeting climate-related goals, such as the Paris Aligned Benchmark.
There are signs, however, that the industry may be paying more attention to the âsocialâ pillar of ESG with more product innovation likely this year.
One of the harshest realities brought to light by the pandemic was how it disproportionately affected less privileged social classes. Speaking to ETF flows‘s Big Call: ESG Investors Forum In November, Sebastian Schiele, sales manager for passive EMEA and APAC mandates at DWS, said this was an area for innovation.
He said DWS was working with index providers to âdeliver and create more personalized and thematic benchmarksâ that focus on the âSâ pillar, targeting companies that have a positive impact on different aspects of society.