ETFs providing exposure to environmental, social, and governance (ESG) strategies are poised for growth, according to a survey conducted by Brown Brothers Harriman (BBH).
Shawn McNinch, Senior Vice President, Global Head of ETF Services at Brown Brothers Harriman.
The custodian and fund administrator, in partnership with ETF.com, interviewed 300 institutional investors, financial advisers, and fund managers from the United States, Europe, and Greater China on their ETF preferences and expectations for the next 12 months.
The survey found that nearly three-quarters (74%) of investors globally plan to increase their allocation to ESG ETFs in 2020. Additionally, 19% of respondents stated that they expect to allocate between 21%-50% of their portfolio to ESG ETFs within the next five years, while a further 30% expect to allocate between 11%-20%.
With data from ETF industry consultant ETFGI showing that ESG ETFs currently represent just $52 billion of the $6 trillion in ETF AUM globally, the findings suggest a massive opportunity for ETF providers of sustainable strategies.
This opportunity appears to be most prominent in Europe where investors ranked ESG as the number one strategy they would like to see more of in ETF format. In the US and Greater China, ESG ranked fourth and second respectively.
The survey also pointed to a growing demand for actively managed ETFs with 57% of investors globally expecting to increase their allocation to active strategies. Opportunities present themselves across a variety of asset classes with investors most interested in actively managed ETFs for global equity, fixed income, multi-asset, and US equity exposures.
There were some significant regional differences in demand for actively managed ETFs. Almost two-thirds (62%) of US investors plan to increase their exposure to actively managed ETFs in the next 12 months, an increase of ten percentage points from 2019. Notable interest in active strategies in the US reflects the long-awaited action now taken by the SEC to approve semi-transparent and non-transparent ETFs.
In Europe, in contrast, the percentage of investors expecting to increase their allocation to actively managed ETFs has fallen from 53% to 43% as limited regulatory action has caused investors to go into a ‘wait and see’ mode.
AUM in smart beta ETFs reached a record $835bn in 2019 and it appears there’s room for growth with more than half (54%) of global investors planning to increase their exposure to smart beta ETFs over the next 12 months, ten percentage points higher than last year.
Enthusiasm for smart beta is especially pronounced in the US where 62% of respondents plan to grow their allocation. In Europe, interest in smart beta has steadily declined, with 41% planning to increase their allocation, nine percentage points lower than last year.
The study also found that ETF adoption, in general, continues to rise across the globe. Over two-thirds (69%) of investors plan to increase their ETF allocation in the next 12 months, an increase of eight percentage points over last year’s survey.
Shawn McNinch, Global Head of ETF Services at BBH, commented, “Across the globe, ETF market growth shows no signs of slowing. In 2019, investors found creative and differentiated ways to use ETFs to drive results. That said, regional nuances exist in terms of ETF usage and managers need to be aware of these as they build a global ETF offering.”
Finally, the survey also sounded a potential warning to smaller issuers looking to enter the market. The study noted that investors require a solid AUM foundation before buying an ETF with only 12% indicating they would buy a new ETF with less than $25 million AUM. The finding highlights an advantage of larger, more established ETF issuers in raising significant seed capital and harnessing their distribution networks.