The ETF Era Is Going to Be Here for a While

Episode Summary

Executive Summary: The episode is Bloomberg Intelligence’s 2023 ETF outlook, arguing that ETFs will keep gaining share despite a brutal 2022 for stocks and bonds. The panel highlights continued ETF growth, especially active ETFs, fixed income ETFs, and more specialized products, while warning that closures may rise and that crypto ETF progress remains constrained. Regional perspectives from Europe and Asia add reopening-driven optimism for China, inflation-protection demand, and local product nuances.

Main Topics: ETF industry growth and market share gains (Priority: 5/5): The hosts and BI analysts argue that ETFs continue to gain flows, launches, and mindshare even in a down market. They frame ETFs as the dominant vehicle of the 21st century, with bear markets accelerating the shift from mutual funds to ETFs and passive strategies. Active ETFs and the rise of transparent active (Priority: 5/5): Active ETFs are portrayed as a major growth area in the U.S. and Europe, especially transparent active funds. The panel sees non-transparent active as a likely long-term niche, while legacy asset managers may launch concentrated 'best ideas' products. Passive vs. active and the migration from mutual funds to ETFs (Priority: 5/5): James Seyffart argues passive assets could overtake active across ETFs and mutual funds, and ETFs could surpass mutual funds in total assets within years. The discussion emphasizes accelerating outflows from mutual funds and continued ETF adoption. Fixed income, income, and inflation-protection products (Priority: 4/5): Bond ETFs are seen as a major winner despite rising rates and weak bond performance. The panel expects growth in fixed income ETFs, income-focused products, gold/metals funds, and structured solutions that help investors generate yield or manage inflation. Crypto and spot Bitcoin ETF uncertainty (Priority: 4/5): The team revisits crypto calls, noting success on Bitcoin futures ETFs but continued skepticism on a spot Bitcoin ETF without congressional action or major regulatory change. They also suggest 2022 was likely the last major crypto speculation boom for now. Alternatives, structured ETFs, and product innovation (Priority: 4/5): Alternative strategies like managed futures, defined outcome, covered call, and single-stock/single-bond ETFs are expected to grow, though mostly in niche form. The discussion stresses convenience, customization, and derivatives as key drivers of new ETF products. Regional outlooks: Europe and China (Priority: 3/5): European ETF growth is expected to favor active and fixed income, while Rebecca Sin sees China reopening as a catalyst for consumer and tech recovery in Asia. The panel also notes cultural and ticker-symbol differences across regions.

Key Arguments: ETFs keep taking share even in bear markets; 2022’s weak markets accelerated flows into passive and ETF wrappers rather than slowing them. Active ETFs are likely to keep growing, especially transparent active structures, while semi-transparent/non-transparent models may remain niche or fade. Mutual funds continue to lose assets at a large scale, and passive could overtake active across the combined ETF/mutual-fund universe within a relatively short timeframe. Fixed income is a major opportunity because investors want yield, inflation protection, and precision exposure in a volatile rate environment. Single-stock and single-bond ETFs succeed because they offer convenience and targeted exposure, but adoption will likely concentrate in a few highly traded names. Alternatives are becoming more credible because some products now deliver diversification or trend-following benefits at lower cost and with better implementation. Crypto ETF progress depends on regulation; without congressional action or clearer SEC authority, spot Bitcoin ETF approval is unlikely soon. China’s reopening is expected to improve consumer activity and support ETF flows, especially in consumer discretionary and tech-related themes.

Data Points: ETF flows: about $600 billion - Eric cites 2022 ETF flows as exceptionally strong despite the market downturn. Mutual fund outflows: almost $1 trillion - Used to illustrate the shift from mutual funds to ETFs and passive investing. Equity market share for passive: about 53% - James gives passive’s share of equity assets across ETFs and mutual funds. Total passive share: about 46-47% - James cites passive’s combined share across all assets excluding money markets. ETF share of mutual fund + ETF assets: about 28-29% - James estimates ETFs’ current share relative to mutual funds, excluding money markets. Bond ETFs expected asset growth: to double over three years - Eric notes his prior call that bond ETF assets would double after the 2020 selloff and says they are close. Fixed income smart beta assets: about $50-60 billion - Eric says fixed income smart beta remains much smaller than equity smart beta. Equity smart beta assets: about $1 trillion - Used to show the gap between equity and fixed income smart beta adoption. ESG market share expectation: 2%-3% - Eric argues ESG funds will remain a small share of the market. Alternatives assets: about $5 billion now, potentially $20-30 billion - James and Eric discuss likely growth for alternatives from a small base. China ETF AUM in Asia-Pacific: roughly 30% of the market - Rebecca says China is the second-largest ETF AUM market in Asia-Pacific. Cash-like ETF yield: about 4% - Eric uses this to explain why investors may favor cash-like ETFs. DBMF assets: about $1 billion - Referenced as a breakout managed futures/alternatives ETF. Active fixed income mutual fund outflows: about $400 billion to half a trillion - The panel emphasizes the severity of outflows from active bond mutual funds in 2022. Single-bond ETF assets: hundreds of millions of dollars - Used to show early traction in precision fixed income products. Hong Kong ticker naming cost: 1 million HKD - Rebecca explains that investors can donate to select certain lucky ticker symbols in Hong Kong.

Pivotal Quotes: "The era of the ETF will be here for a while." — Eric Balchunas: Core thesis of the 2023 BI outlook: ETF growth remains durable despite market turmoil. "Bull markets are good for ETFs, but bear markets are even better." — Eric Balchunas: He references a prior BI outlook and uses 2022 to argue the point was validated. "Consumers love convenience. Make it easy. They will come." — Eric Balchunas: Explains why single-stock, single-bond, and other highly targeted ETFs are gaining traction.

Implications: Expect more ETF launches, especially active, fixed-income, and niche thematic products, but also more closures and product consolidation. Mutual funds will keep losing ground, while regulation will largely determine crypto ETF progress.