Shawn McNinch, managing director at Brown Brothers Harriman, says ESG products have had more traction in Europe but are getting traction in the U.S. as more institutional money goes into them. He also notes that advisors have been seeking out ESG funds, presumably to meet client demand.
McNinch sees a growing trend of asset managers converting their actively managed mutual funds into active ETFs. Notable examples are Dimensional Fund Advisors and JPMorgan.
“It’s sort of instant assets into the active ETF space,” says McNinch, whose firm provides a range of back office support services to ETF providers. “We supported three mutual fund-to-ETF conversions with active managers, and we have about five more in the pipeline.”
He adds that most of the conversions result in fully transparent products, as these managers are comfortable showing their daily holdings. “We’re not seeing as much traction with semi-transparent ETFs,” McNinch says, referring to products from asset managers mimicking their own existing active mutual funds but without the requirement of making daily portfolio disclosures.
Hammered Bonds
The Federal Reserve’s aggressive rate hikes have hammered bond prices and forced investors to seek refuge in short-duration bond funds. In his email, Geraci suggested it’s prudent for ETF investors to maintain a more conservative posture on fixed income and tilt toward shorter duration and higher quality holdings.
“There is no shortage of ETF options in this space,” he said, mentioning such products as the Pimco Enhanced Short Maturity Active ETF (MINT) and JPMorgan Ultra-Short Income ETF (JPST). “Investors might also give strong consideration to laddering target-date maturity bond ETFs given the flexibility this approach provides.”
One example he points to are exchange-traded funds in the Invesco BulletShares investment-grade corporate bond suite.
A Threat To ETF Dominance?
While some ETF watchers expect current trends to continue in the coming year, there’s a developing trend that might someday let some air out of the ETF balloon. And that’s the concept of direct indexing—a personalized investing strategy where people can buy specific securities within a particular index they want to replicate and customize the weightings or exclude certain stocks they don’t want to own. In effect, it turns vanilla beta exposure into a flexible tool allowing for more tax-loss harvesting opportunities, factor tilts and targeted ESG exposures, among other features.
According to a report this summer from Cerulli, direct indexing is expected to grow at an annualized rate of more than 12% over the next five years, faster than mutual funds, ETFs and separate accounts. But that 12% growth is coming off a small base.
Direct indexing has been a niche area traditionally reserved for high-net-worth clients, but the advent of commission-free trading and fractional shares could make it more doable for retail investors at large. It remains to be seen how that will affect ETFs down the road.
McNinch offers that it could be a threat if it can be done cheaply.
But CFRA’s Ullal thinks direct indexing and ETFs can co-exist just fine. “I think it’s more of a complement to ETFs because I think direct indexing caters to a different segment than the average ETF investor.”