Despite tough market conditions in 2022, asset flows into exchange-traded funds this year were remarkable.
Among the four major asset classes of stocks, bonds, real estate and commodities, only commodities experienced widespread gains. Yet the U.S. ETF market vacuumed in $588 billion, according to data from Bloomberg Intelligence. By comparison, mutual funds saw almost $1 trillion in asset outflows.
Looking ahead to 2023, what will power the upward trend in ETF assets? How can the ETF industry make sure it’s properly positioned for growth? And how can financial advisors help their clients to capitalize?
Focus On Distribution
Innovation in the ETF industry is widely celebrated, and few areas within Wall Street can beat ETF creators when it comes to novelty. But the industry seems to wrongly believe that it can win the asset-gathering race by innovating its way to perennial growth by launching new products.
Years ago, John Bogle, Vanguard’s founder, accurately observed, “Mutual funds are born to die.” The same can be said about ETFs.
The pace of ETF liquidations topped 132 this year, according to ETF Global. If we include 2022, 780 ETFs have been liquidated over the past five years. This figure represents a lofty 26% of the current ETF market, which has 3,030 listed funds.
Another 71 ETFs are at risk of being sacked at any moment for poor performance and anemic assets, ETF Global says. Among this sad group are ETFs with sophisticated investment strategies. Let’s hope the ETF issuers behind these products understand that innovation alone won’t bring asset inflows, nor does it guarantee success.
Go Where The Money Is
You’ve probably heard the joke: Why do criminals rob banks? Because that’s where the money is!
The joke could also be about ETF providers, or at least it illustrates one of their sore spots: that their products are missing from many of the distribution channels where the money actually is. The industry has been so focused on creating new investment concepts that it has unfortunately been distracted from the all-important role of making sure its products are readily available to all types of investors, especially retirement savers.
How are people going to benefit from ETFs’ financial innovations if they can’t even get an ETF in their workplace retirement plans? How can financial advisors deploy such funds if the funds aren’t inside 401(k)s and 403(b)s?