$1 trillion in U.S. ETF inflows next year? ‘It’s safe to say that the sun is setting on the mutual-fund era:’ Here’s what’s in store for 2022.

$1 trillion anyone? Well, some think that is possible, even if it feels a tad unlikely. Then again, few saw 2021 playing out the way it has thus far.

Bring out the bubbly!

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The good

…and the bad

$1 trillion in U.S. ETF inflows?

We talked to some of the smartest people in ETFs to get their take on the next 12 months for the industry.

The elevator pitch: We’ll likely see more of the same for ETFs, unless the stock-market goes pear-shaped (and it is fairly reasonable to argue that even if market’s sour, net flows to certain segments, such as fixed-income and inflation hedging tools, might yet drive flows into positive territory).

Dave Nadig, director of research and CIO at ETF Trends, tells MarketWatch’s Wrap in a Tuesday interview that inflation worries and its impact on investing will be the persistent theme in the near to mid term.

Nadig argues that we could see $1 trillion in U.S. net inflows in 2022, adding that “there’s still a tremendous amount of money” looking to find a place to invest.

“Inflation is going to be a dominant part of the narrative for at least the next quarter or two,” he said, based on his conversations with investment advisers.

“We’ll continue to see a lot of income-oriented products,” Nadig said, noting that investment managers are using such products to hedge risk as well as to gain exposures. “Investors are aiming to find income and managing the volatility,” he said.

“This year already saw clients and channels morphing, and I believe this will continue into 2022,” Anna Paglia, head of ETFs and indexed strategies at Invesco, told Wrap in emailed remarks.

Indeed, firms such as Dimensional Fund Advisors converted mutual funds into active ETFs, which marked an accelerating trend in 2021. Meanwhile, Fidelity Investments and other firms rolled out ETF alternatives of popular mutual funds.

The economy and the impact of omicron variant of coronavirus on markets and business remains the elephant in the room, across the board.

“If we end up with the market down 15% or the VIX at 25, all bets are off,” Nadig said, referring to the Cboe Volatility Index VIX, +4.86%.

Ben Johnson, director of global ETF research at Morningstar, tells Wrap that 2021 will be tough to top, in terms of flows. “Flows will depend on whether the market acts like a lamb or a lion,” he said in a Tuesday phone interview.

Johnson said that the level of activity new launches in 2021 is worth noting.

“We have 421 launches through Dec. 10, almost double the new open-ended new mutual fund launches in 2021,” he said, noting that ETFs also saw 100 more launches, compared against ETF debuts last year. That includes the likes of Neuberger Berman, which has filed to offer three actively managed thematic ETFs, marking the 80-year-old money manager’s first foray into the fund segment.

So, what does the growth of ETFs mean for other fund types.

“It’s safe to say that the sun is setting on the mutual fund era,” Johnson said. It’s high noon…and we’ve got our spurs on and we are clanking them out as we traverse the dusty road,” he joked. “At the margins, many longtime holdouts are finally joining ETFs.”

That is not to say that ETFs will overtake mutual funds soon (though Nadig isn’t so sure that that isn’t a possibility in the ensuing two or three years), Johnson said.

As of Nov. 30, U.S. mutual funds boast $20.3 trillion in total assets, compared with $6.96 trillion for ETFs, Johnson said.

“Yes, markets have been strong, but more than 600 billion of those dollars have come from new investor inflows,” wrote Rich Lee, head of program trading at Baird, in a research note.

“What that tells us is where money is today. And 75% is sitting in open-ended mutual funds but that number has been steadily shrinking and because money has been flowing more rapidly into ETFs than it has in mutual funds,” Morningstar’s Johnson said.

The Wall Street Journal reported that more than half of the record 380 ETFs launched in the U.S. in 2021 are actively managed, according to FactSet, with Fidelity, Putnam and T. Rowe Price among the firms that have rolled out actively managed ETFs in 2021.

CFRA analyst Todd Rosenbluth told Wrap that actively managed equity ETFs could represent 10% of the asset category’s net inflows in 2022, referencing his recent research report.

Rosenbluth, the head of ETF and mutual fund research at CFRA, also said that thematic ETFs have seen a steady climb, with focus having shifted to electric vehicles and infrastructure in 2021, compared with cloud computing and cybersecurity in the prior period.

“Investors have over 200 thematic ETFs to consider for 2022 as they look to identify the next long-term trend,” he wrote.

Bank on it?

Matthew Bartolini, head of SPDR Americas Research, said that bank loan ETFs have represented a strong upward trend in fund net inflows, as low interest rates and an appetite for fixed-income products has supported buying.

Bank loan ETFs have taken in about $10 billion so far in 2021, smashing the previous calendar-year record in 2013 at roughly $5.5 billion. Bank loans offer a way to hedge exposure to interest-rate volatility because that debt is usually floating rate.

“The average Bank Loan ETF has produced a total return of 3.24% in 2021,” wrote analysts at Citigroup in a Tuesday research note. “This is slightly better than popular High Yield index returns of circa 3%, and notably better than the losses that have accumulated in intermediate-duration US IG Corporate, and USD-denominated [emerging market] Debt exposures,” they wrote.

Expensive to cheap

Elisabeth Kashner, FactSet’s director of ETF research, told MarketWatch’s Wrap that the lower-fee trend, with ETF’s helping to drive down costs for end users is worth noting. Some of the biggest funds boasting the lowest fees, were some of the beneficiaries of this trend.

Funds like Vanguard Total Stock Market ETF VTI, -0.46% carry a rock-bottom expense ratio of 0.03, which translates to an annual fee of 30 cents for every $1,000 invested. That Vanguard behemoth has total assets of $292 billion. Similarly, Vanguard S&P 500 ETF VOO, -1.04%, which has the same expense ratio, and manages $270 billion, has been seeing inflows, Kashner notes, as has the SPDR S&P 500 ETF Trust SPY, -1.06%, which costs 0.09%.

“The top positions in the flows aren’t taken up by [actively managed] funds, they are made up of simple broad-based portfolio building blocks that are cheap and getting cheaper all the time,” she said.

Kashner said that it is impossible to know whether these trends “will speed or slow” in 2022 but does expect the trajectory to point higher in the new year.

Get out the VOTE

FactSet’s Kashner said that newly launched Engine No. 1 Transform 500 ETF VOTE, -0.87% is worth watching in coming years because it offers a feature that has been lost in the era of democratized investing aided by the advent of low-cost products: voting your shares.

“Proxy voting has been left to the asset managers who often answer to a broad client base with diverse and potentially contradictory values,” she said.

The analyst said that Engine No. 1, which is new to ETFs and has garnered a reputation of shareholder activism after the small hedge-fund scored a coup this year by placing three climate-focused, independent directors on oil giant Exxon Mobil’s XOM, -2.18% board.

VOTE boasts a comparatively low expense ratio of 0.05% and thinks it can differentiate itself by focusing on a select number of ESG issues each year, including climate, racial equity, living wages and other social issues, Yasmin Dahya Bilger, managing director and head of ETFs told Wrap back in June.

Kashner says that VOTE is innovative because it is harnessing a previously underused investor asset, “and returning power to its fundholders,” echoing comments she made in an earlier blog post.

An ESG grows in ETF land

Speaking of environmental social and governance issues, ETFs have been steadily growing in the fund space.

Nadig referred to it as the “slow inexorable drumbeat of ESG, which keeps pounding.” He predicted that that trend would only continue next year and added that the push by the Securities and Exchange Commission to provide more regulatory guidelines around statements and disclosures is likely only to buttress the ESG industry and the growth of ETFs in that style and theme.

2022’s narrative ARK?

It’s been a tough one for Cathie Wood. During a Bloomberg TV interview, the star fund manager expressed some concern about the challenges her funds are facing in recent weeks, as her suite of technology-centric ETFs experience an epic swoon following a stellar performance in 2020.

Is there more pain next year for Wood?

It’s anyone’s guess, outside of her genomic ETF, the broad collection of ARK ETFs were sinking on Thursday, even as the S&P 500 SPX, -1.03%, the Dow Jones Industrial Average DJIA, -1.48% and the technology-heavy Nasdaq Composite Index COMP, -0.07% have outperformed them in the year to date.

Wood recently launched the ARK Transparency ETF CTRU, +1.75%, which kicked off on Wednesday, focus is on the booming demand for products that meet higher environmental, social, and governance, Barron’s Evie Liu writes. It is down 3.9% so far this week.

Meanwhile, Tuttle Capital Management’s anti-Wood ETFs have drawn some $100 million in 24 days and are up 25% over the past 30 days. The fund charges an expense ratio of 0.75%, which incidentally is the same expense ratio as Wood’s ARK Innovation ARKK, +5.80%.

Matthew Tuttle, Tuttle Capital CEO, told Wrap back in August that Wood created an entire market segment that some refer to as unprofitable tech and that area hasn’t been working well, in an environment in which borrowing costs are expected to rise.

A ‘spot’ bitcoin ETF ahead?

Although, the resurgence of crypto like bitcoin BTCUSD, -0.48% and Ether ETHUSD, -0.60% on the Etherum blockchain were another big theme, with the first bitcoin-futures BTC.1, -2.42% ETF making a debut. None of the professionals that the Wrap spoke with believe there’s a good chance that a spot bitcoin ETF will be approved by the SEC as early as 2022.

That said, it’s hard to ignore the popularity of the futures based ProShares Bitcoin Strategy ETF BITO, -3.52%, which boasts $1.3 billion under management, despite a 20% decline over the past 30 days.

“Though we do not trade or make markets in crypto assets, it is impossible to talk about the ETF world in 2021 without highlighting the success of the first bitcoin futures ETF to come to market,” wrote Baird’s Lee.

“With its record-setting debut, it plants a flag for crypto access via the ETF category and ensures we will all be talking about how/why/when we’ll see direct digital assets exposure come to the ETF space.”

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