ETF 2021 Outlook: Watch out for International Equity and Active ETFs

Most people are probably happy to waive goodbye to 2020 amid the COVID-19 pandemic, which played out in ways few could have possibly predicted. David Mann, our Head of Global Exchange-Traded Funds (ETFs) Capital Markets, isn’t going to make predictions about vaccines, mask-wearing or other such matters, but does offer his insights on ETF industry trends he sees taking shape.

January is a month of resolutions and prognostications, so it’s also time for my 5^th annual ETF predictions column! You can find all prior editions (2020, 2019, 2018 and 2017) if you’d like to revisit them. You can also find my 2020 report card column here.

I must admit that there were a lot of mixed emotions in writing this year’s outlook column. On the one hand…2020. Ugh! I would most certainly put myself in the “let’s go ahead and turn the page on this dumpster fire of 2020” camp. On the other hand, my family is happy and healthy, and from an ETF perspective, 2020 was fantastic. When the dust settles, ETFs will have seen somewhere around half a trillion dollars of inflows for the year 2020.¹ Astonishing!

Given that even a global pandemic cannot seem to slow down these markets, it would not surprise me if the trend of ETF inflows continues unabated. That possibility certainly helped drive several of my predictions for this year. Without further ado:

ETFs that hold international equities will account for over 50% of 2021 inflows

Here are the two relevant stats for US-listed equity ETFs that hold international stocks:²

• They account for approximately 25% of ETF assets under management (AUM) in the United States

• In 2020, they represented 26% of the ETF equity inflows.

I fully acknowledge that getting to 50% is a significant leap; however, there are some recent trends that could certainly help. Many international equity markets have lower valuations when compared to US equities. Worldwide, countries have handled their responses to the global pandemic very differently in terms of economic stimulus, which certainly helps the case for targeted single-country investing. Lastly, a new US administration may take a very different approach to international trade, which could also impact foreign currencies, a major factor in the returns of US ETFs that hold international stocks.

Put all those possibilities together and there is a real chance for some significant international equity investments via US-listed ETFs.

We will see even more smaller funds make an even bigger AUM leap

As a reminder, this is an ETF Capital Markets blog. For more than four years now, I have discussed ETF trading and liquidity in these pages and tried to push back on all their associated misconceptions. I have not been afraid to use everyday analogies including restaurants, furniture shopping, and even buying an a mattress online. Heck, I broke out quantum physics this past year!

As such, it should not be surprising that I enjoy seeing the adoption of smaller ETFs. I might sound like a broken record, but to repeat what I wrote on this topic last year: investors continue to become more comfortable with the best practices when trading newer funds and understand that trading multiples of the average daily volume is now commonplace.

Thus, for the third straight year I am going to make a prediction based on smaller funds continuing to attract significant interest. As you will recall from my report card, more funds made a significant AUM leap over $500 million than I had anticipated this past year. That means we now need to move the bar even higher.

In 2020, there were 1,227 ETFs that started the year with under $200 million.³ We saw 10 of these funds finish the year with over $1 billion of AUM. That is a monster leap! Yes, the positive market moves in some asset classes certainly helped, but the only way to get a 5x-AUM move is with some serious inflows. And the only way to get serious inflows is that investors need to 1) like the investment philosophy of the ETF and 2) understand that trading and liquidity is not an issue.

This year starts with 1,130 ETFs that are under $200 million in AUM. By the end of 2021, I predict 15 of these funds will brag about reaching the $1 billion milestone.

Active ETF assets will reach $250 billion

I discussed the inflows into active ETFs a fair amount in my 2020 scorecard. To repeat some of the key stats here:

• Total active ETF AUM is currently ~$170 billion, which represents ~3% of all ETF AUM

• Active ETFs had $55 billion of inflows in 2020, which represents ~11% of inflows in 2020

As with my other predictions, there are a lot of reasons for optimism. Investors are becoming more comfortable with getting active exposure via ETFs, partly due to the ETF Rule, which is now live for all ETF issuers. It explicitly states that there is no operational difference between active and index ETFs. Semi-transparent active ETFs launched for the first time in 2020, and now collectively have almost $1 billion in assets.⁴ Increased adoption and discussion of semi-transparent ETFs can only help to increase the overall industry awareness of all active ETFs, especially transparent active funds, which make up almost all the active ETF assets.

My team and I feel the percentage of ETF inflows coming from active ETFs will continue to rise. Assuming positive market moves and continued adoption of ETFs, we think $250 billion of active assets is well within reach.