Returning to work after an extended break to a new role for ETF Stream has provided this correspondent with plenty of compelling evidence of the extraordinary dynamism and creativity that is fuelling growth across the ETF industry as interest from investors continues to expand worldwide.
Global inflows into exchange-traded funds and products are running at a record-breaking pace, reaching $1.45trn over the first 10 months of this year and already surpassing the near $1trn haul registered over the whole of 2023, according to the consultancy ETFGI.
Deepening ETF penetration across all asset classes and regions is leading to growth for multiple parts of the ETF industry to move into an even higher gear.
So far this year, allocations to fixed income ETFs have reached $282.6bn globally and even more – around $288bn – has gone to actively managed ETFs where demand has seen an explosion of interest since 2020. Both of these sectors are set to end 2024 with record levels of assets.
Just how much new cash is flowing into active ETFs or is being cannibalised existing active strategies remains debatable. However, it is indisputable that a growing number of traditional asset managers are now abandoning their previous reluctance to adopt ETFs as part of their fund range.
Cryptocurrency ETFs are another relatively new sector where interest is burgeoning at a truly eye-popping rate with 2024’s inflows already reaching $61bn even before the euphoric surge in the price of Bitcoin that greeted Donald Trump’s victory the US presidential race.
That haul looks certain to grow given investors’ expectations that Trump’s entry to the White House will provide a far more crypto-friendly environment and abandon the far more cautious stance towards digital currencies adopted by US regulators under the Biden administration.
Even more striking to this correspondent’s eye is this year’s avalanche of new launches with more than 1,600 debuts by 341 providers already competed. Innovation and competition are undoubtedly thriving but this frantic pace of product proliferation also adds to concerns that some managers are simply jumping onto the ETF bandwagon with poorly designed strategies that fail to live up to expectations.
How many investors were actually crying out for an ‘Inverse Jim Cramer ETF’ and will anyone really mourn its demise less than one year after its debut.
Looking at Europe and it is clear that pace of expansion has also accelerated. Investor inflows have reached $207.8bn so far this year with nine of the top 10 ETF managers seeing a jump in new business.
However, the contributions made by retail investors throughout Europe remain extremely modest with institutional investors still providing the vast bulk of the industry’s inflows.
European policymakers and senior regulators hope that growing awareness of ETFs can encourage savers to move more money out of bank accounts paying low interest rates into investment products that should deliver higher returns.
Households across the EU hold on average 34% of their financial savings in cash accounts, according to the consultancy New Financial. Shifting some of this cash into low-cost investment funds, such as ETFs, would also help to strengthen Europe’s capital markets and provide a much-needed boost to economic growth across the region.
A potentially transformational development towards the policy objective of encouraging far broader involvement by retail investors now exists with the creation of low-cost ETF savings plans. These plans are designed to encourage inexperienced and young investors to begin their investment journey with modest monthly contributions into a basket of ETFs.
Around 10.8 million of these ETF savings plans have now been created in Europe, an increase of 42% in just a year, according to a study published this month by BlackRock and extraETF.
Germany, with 9.5 million ETF savings plans, represents the main driver of this new segment while encouraging evidence of interest is also building rapidly in other countries including the Netherlands and Switzerland.
The amount of money invested so far via these ETF savings plans is still very modest at just €17.6bn but larger banks and brokers are starting to pay attention to the clear potential for future growth via this channel.
The acquisition of the e-broker BUX by the retail bank ABN Amro at the end of last year is just one sign of how bigger players now see ETF savings plans as an attractive growth opportunity.
The interest now being shown by more banks and brokers could help to push the number of ETF savings plans in Europe up to 32 million as early as 2028, according to extraETF’s founder and chief executive Markus Jordan.
But the potential to attract a far larger number of ordinary investors is surely obvious and governments must help. Much bolder action is required by politicians across the EU if they really want to achieve their stated objectives of improving the financial futures of all of their citizens.
If EU governments were to decide that ETF savings plans should be tax free, then the appeal of such schemes would be transformed.
European policymakers are undoubtedly aware of the success of the UK’s tax-free individual savings accounts (ISAs) in drawing millions of ordinary savers into investing and should now extend this model to ETF savings plans to accelerate their adoption.
Making ETF savings plans tax free would be a really significant demonstration of support for ordinary investors, particularly younger investors, by politicians in Brussels and the capitals of Europe. It would surely prove a vote winner. Let us all hope that action follows swiftly.
