What's In Store for ETFs in 2022

By all accounts, 2021 was another banner year for the exchanges traded funds as records were shattered in some marquee categories.

In terms of new product launches, the number was approximately 500 and easily topped prior high watermarks. That's just one record. The other one – the one that industry insiders frequently highlight and with good reason – is inflows. The 2020 record of $505 billion was topped and that happened in July 2021.

By the time the end of November rolled around, ETF inflows stood at $794 billion. Fast-forward to the end of 2021 and that tally jumped to $902.6 billion with global ETFs holding a staggering $7.2 trillion in assets.

Interestingly, for all the success ETFs enjoyed last year – and much of it accrued to passive products – that's not a death knell for active management. In fact, when accounting for environmental, social and governance (ESG), smart beta and thematic funds, along with traditional active fare, a majority of the new ETFs that debuted in 2021 can be considered “active” in some form or fashion.

While the expansion of the ETF field and ongoing flows to the asset class don't determine performance, advisors are likely pondering if these themes will continue this year. The answer is....

...Probably and On Both Counts

Without the benefit of a crystal ball, it's impossible to know how many new ETFs will come to market this year, but given the industry's proclivity for new products and its seemingly “try anything once” mentality”, it's a certainty that there will be another bumper crop of new ETFs coming to market this year. However, I'd put the total under last year's tally.

As for inflows, that's bit murkier because that's driven in part by investor sentiment and, obviously, market performance. One thing that's practically guaranteed is that advisors and other asset allocators will continue embracing highly liquid, low-cost, mostly boring ETFs.

“Most of the money continues to flow into the most broadly diversified, the lowest-cost, supremely tax-efficient, extraordinarily liquid exchange-traded funds,” says Morningstar's Ben Johnson. “Investors are perfectly happy to pour their money into funds that are every bit as exciting as watching paint dry and grass grow at the same time.”

As advisors often tell clients, boring is beautiful and boring in the ETF space is far from a derogatory adjective. It's usually a compliment because it's often accompanied by a paltry fee, total cost of ownership and minute chances of capital gains distributions.

Something to Bet On

It's unfortunate we cannot bet on outcomes in the ETF world because I'd bet the farm, the mortgage and my unborn kids' colleges savings on more mutual fund to ETF conversions.

“This is really, I think, an exclamation point on a trend that's been in place for quite some time,” adds Johnson. “What we see is really the sun has begun to set on mutual funds, and you see that really come out when you analyze the flows data. Most incremental dollars, certainly in the equity space, are beginning to flow into ETFs as opposed to open-ended mutual funds. ETFs are becoming the format of choice for a growing number of investors.”

No one should need any convincing of this fact. Consider the case of Dimensional Fund Advisors (DFA) – a fund issuer many advisors are undoubtedly familiar with. DFA was a bit player in the ETF universe in 2020. Last year, it converted some of its famed mutual funds to ETFs and as of Jan. 3, the issuer is the 12th-largest ETF sponsor with $41.47 billion in ETF assets under management. Expect more of that this year and from more mutual fund companies.

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