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As benchmarks regathered lost ground in the second half of 2020, inflows into exchange traded funds (ETFs) reached unprecedented levels. Data shows USD 507.4 billion was injected into US-listed ETFs in 2020, a new record and a 55% increase compared with 2019. [1] With ETFs and ETPs in the US managing USD 5.52 trillion [2], it is expected that allocations into these securities will continue to increase in 2021. BNP Paribas looks at some of the main dynamics shaping the US’ burgeoning ETF market.
Today, 80% of ETF assets under management (AUM) are concentrated in the hands of just a few issuers.[3] Despite this, Jeffrey Baccash, Global Head of ETF solutions at BNP Paribas, is confident the industry is on the verge of entering a new golden age as it continues on a path of innovation. “The past success of the ETF as an efficient investment vehicle for a diverse range of asset exposure makes it a logical mechanism to meet future areas of interest for investors,” he said.
Thomas Centrone, Head of ETF solutions, North America at BNP Paribas, noted that increasing numbers of active asset managers – including those managing mutual funds – are converting assets into ETFs. “We have seen actively managed portfolios being converted into ETFs,” he said. This renewed interest in ETFs comes as active fund managers look to broaden their distribution footprint, to counter the outflows they suffered during the volatility of last year.
Whereas previously ETFs would likely follow an index, more actively managed ETFs are now coming to market, a trend that has been accelerated by fee compression in the industry.
“Volatility in the market is also spurring investor demand for more proactive management to guard against big price swings,” commented Centrone. The active ETF model was also given a boost by the Securities and Exchange Commission (SEC) in 2019 when the regulator authorized the use of so-called active non-transparent ETFs.
In contrast to traditional ETFs that publish their positions daily and are priced on an intra-daily basis, active non-transparent ETFs are subject to less frequent reporting requirements. This flexible reporting structure appeals to active managers in particular. As a result, it is likely more active managers will diversify into this space. Already, the asset class is seeing robust growth, with NASDAQ highlighting there were 19 active non-transparent ETF launches in 2020. [4]
Centrone also said there had been a sizeable uptick in the number of thematic ETFs coming to market, especially those focusing on ESG (environment, social, governance).
Investors in Europe have been ahead of the curve on ESG, although it is catching up in the US, especially with the new administration prioritizing climate change and signing up to the Paris Accord. Of the 53 thematic ETFs that launched in 2020, 53% were ESG-orientated, while a further 9% specialized in green investments. [5]
Thomas Centrone
Head of ETF Solutions, North Americas, BNP Paribas Securities Services
Beyond ESG, Centrone said there was growing investor appetite for crypto-currency ETFs. While there are presently no crypto ETFs available in the US, it is a trend to watch in the future.
Underpinning the ETF industry’s growth will be its approach toward distribution, something that is also likely to result in growing mutual fund conversions into ETF structures. Baccash believes ETFs are well-suited for the digital age.
ETFs fit into the app culture because they look like shares of any single name equity and can be traded very easily.
Jeffrey Baccash
Global Head of ETF Solutions, BNP Paribas Securities Services
If the actual ETF buying process is straightforward – and retail investors can access products through their smart devices – then inflows into the asset class will follow. This will be vital if the industry is to accumulate capital from tech-savvy millennial investors.
If the ETF industry is to thrive, it will need to engage with leading service providers. BNP Paribas expanded its ETF servicing footprint into the US last year, having already offered solutions in France, Luxembourg, Brazil, Hong Kong and New Zealand. With a wider range of ETF strategies now in the market, Baccash said service providers need to be forward-looking.
BNP Paribas’ latter entry into ETF servicing in the US, continued Centrone, meant that it was not saddled with legacy infrastructure, which put it in a strong position to develop extensive functionalities and innovative technologies, including application programming interfaces, artificial intelligence, chat tools, transparent dashboards, mobile applications, universal databases, multi-lingual desktops for global offerings and intuitive input.
“We have been very proactive in our engagement with the ETF ecosystem and as a result our platform has been specifically designed for the long-term, which will accommodate all of the changes that are happening in the ETF market.”
Jeffrey Baccash
Global Head of ETF Solutions, BNP Paribas Securities Services
The decision by BNP Paribas to launch an ETF servicing unit in the US could bring a number of strategic benefits to the market. With another market entrant, there will be greater competition and choice for issuers who may otherwise have felt under-serviced.
Most critically is that the dearth of providers in the US servicing the ETF industry creates concentration risk, said Baccash. “We believe that ETF boards are becoming uncomfortable with concentration risks. There are fund complexes in the market running hundreds of billions of dollars, while a handful have broken through the $1 trillion barrier. Meanwhile, there is only a small group of ETF servicers in the market. Back-up contingencies and diversification of servicing agents is essential to facilitate the industry being able to continue to grow in a sustainable manner,” he said.
ETFs are undergoing a period of rapid transformation and are becoming increasingly diverse in nature, by adopting thematic and active investment approaches. If the industry is to grow its AUM share even further, then it will need to work closely with best-in-class service providers who are committed to technological innovation and are willing to evolve alongside their clients.
BNP Paribas is offering a fresh look at ETF servicing focusing on the clients’ requirements in terms of service delivery, fees and technology.
Thomas Centrone
Head of ETF Solutions, North Americas, BNP Paribas Securities Services
[1] ETF.com (January 4, 2021) Record ETF assets growth in 2020
[2] ETF Trends (February 16, 2021) ETFGI reaches new ETF record of $5.52 trillion in invested assets
[3] Bloomberg (January 9, 2020) The hidden dangers of the great index takeover
[4] NASDAQ (January 6, 2021) ETF 2020 wrap: Launches in 2020
[5] NASDAQ (January 6, 2021) ETF 2020 wrap: Launches in 2020
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