Actively managed and smart beta ETFs are expected to account for a larger share of the ETF industry’s assets under management over the next three years, according to research by JP Morgan Asset Management.
JP Morgan has released the results of its second annual Global ETF Survey.
JPMAM examined the views of 320 professional ETF investors from the US, EMEA, Asia Pacific, and Latin America as part of its second annual Global ETF Survey.
Respondents included independent wealth and asset managers, discretionary fund managers, independent advisory and brokerage firms, private banks, fund-of-funds, insurance companies, and investment platforms for defined contribution plans.
The survey revealed that investors anticipate that almost two-fifths of the ETF industry’s AUM will be dedicated to actively managed and smart beta products within three years, up from 31% today, with AUM split broadly evenly between active (21%) and smart beta (18%) strategies.
In contrast, passive ETFs (as defined by market-cap-weighted index trackers) are expected to see their share of total AUM reduced from 69% to 61% over the same period.
Growth expectations vary widely by region, however.
US-based respondents expect active ETFs to rapidly gain an edge in the next few years, making up more than a quarter (26%) of ETF allocations by 2023, up from 19% today. This view has likely been influenced by the SEC’s recent approval of a new breed of semi-transparent active ETFs that is expected to lead to a wave of asset managers utilizing the innovative structure in the near future.
While US investors are feverish about active ETFs, they are less thrilled with smart beta with allocations to the segment expected to remain at 19% over the next three years.
This is not the case in Asia Pacific, however, where allocations to smart beta ETFs are expected to grow significantly from 21% to 25% over the same period.
European investors expect to grow their allocations to both segments over the next three years. AUM in smart beta ETFs is expected to increase from 11% to 15%, while active ETFs’ share is expected to expand from 18% to 21%.
ESG and thematic ETFs are seen as key growth drivers in the near future. Globally, more than half (59%) of respondents predict strong growth in ESG ETFs by 2023, while 42% believe thematic ETFs will similarly grow over the same period.
Again, growth expectations differ by region with US investors less enthusiastic about both segments.
ESG ETFs are earmarked for significant expansion by around seven in 10 respondents in EMEA (72%), Asia Pacific (70%), and Latin America (68%), while just 41% of US-based investors expect allocations to socially responsible ETFs to increase.
Respondents indicated that a variety of factors were driving client appetite for ESG ETFs including rising concern over climate change, the desire to improve risk-adjusted returns, and a preference for values-based investing from younger generations.
In terms of thematic ETFs, only 27% of US investors indicated they expect the segment to grow in the next three years in contrast to a majority (52%) of EMEA investors.
Jed Laskowitz, Global Head of Asset Management Solutions at JP Morgan Asset Management, commented, “We’re seeing a significant shift in sentiment and in the way investors use ETFs in portfolios. They are exploring their options and increasingly looking to diversify their use of ETFs beyond passive strategies. The current and expected growth in ESG ETFs and active ETFs is proof that these vehicles are likely to play a bigger role across investor portfolios.”
Olivier Paquier, Head of ETF Distribution in EMEA, added, “ETFs are increasingly viewed as tools that can help to meet varied financial and investment objectives. We think ETFs will continue to be utilized as cost-efficient, flexible wrappers for a growing range of investment styles and underlying assets as the technology continues to play a role in the democratization of investing.”