State Street is tipping the global exchange-traded fund (ETF) market will expand by up to a quarter this year “and into the future” with Asia-Pacific a key growth region.
In its latest annual outlook for the sector, State Street says global ETF assets under management hit a record US$11.6 trillion at the end of last year buoyed by the second-best 12-month period of net flows.
Several Asia-Pacific markets clocked new “highs for net [ETF] inflows” including China, South Korea, Taiwan and Australia, the report says.
And while the 2023 result sets a high bar, the open-ended listed fund business is poised for ongoing expansion as the ETF trend gathers pace across more regions, investment style and asset classes.
“We expect the global ETF market will continue to see significant growth (between 20-25 percent compound annual growth rate [CAGR]) this year and into the future,” the State Street study says.
Passive funds continue to represent the vast majority of ETF assets under management but net flows into active strategies soared by 50 per cent year-on-year in 2023 to top out at US$183 billion – or almost 20 per cent of the total market inflows.
“Interestingly, much of the new flows to active ETFs are not coming solely at the expense of active mutual funds, but also from smart beta ETFs, which made up only 6 percent of 2023 flows.”
Product innovation combined with regulatory relief and increasing manager acceptance of disclosure rules will likely underpin further growth in the active ETF market, the report says.
According to State Street forecasts, Australia alone would see the “entry of 10 new issuers leveraging the dual registry/share class model” over 2024.
NZ has yet to see active ETFs list on the local market that is currently limited to 40 indexed products offered under the NZX Smartshares brand.
However, Australian rival, Betashares, which launched a range of six unlisted funds here last year (with another NZ equities product understood to be in the works), has flagged a move to list some of its ETFs directly on the NZX.
As at the end of March, Smartshares recorded just over $8 billion in its ETF suite, up more than a third year-on-year: about $2.8 billion of the total was sourced from external investors.
State Street, which has bragging rights as the first ETF issuer with a US share market tracker launched in 1993, expects investor appetite for the listed fund products will only increase while issuer “innovation” will cater to more investment strategies covering active styles, fixed income and alternative assets.
Jonathan Steinberg, founder of US ETF provider WisdomTree, says in the report that the listed fund product type has “overwhelmed the other structures” on the back of superior “liquidity, transparency, [and] tax efficiency”.
“So, right now, ETFs are the best wrapper in the world,” Steinberg says.