ETF assets close to $10tn after second year of record growth

More than $1tn in new cash has poured into the exchange traded fund industry in 2021, with equity-focused ETFs attracting strong inflows in the closing weeks of the year even as concerns about the Omicron coronavirus variant weigh on investor confidence.

Net global inflows into ETFs (funds and products) had reached $1.14tn by the end of November, compared with the record annual haul of $762.8bn gathered over the whole of 2020, according to ETFGI, a London-based data consultancy.

The inflows took global ETF assets under management to $9.92tn at the end of the month, meaning the figure is likely to surge beyond the $10tn mark for the first time in December.

Previous Decembers have often provided some of the strongest months on record for new business for ETF providers, particularly when the US stock market has rallied into the end of the year.

“As well as record inflows for ETFs listed in both the US and Europe, we have seen record inflows in newer categories such as actively managed ETFs and with environmental, social and governance [ESG] ETFs. These are promising areas for future growth as ETFs penetrate deeper into financial markets worldwide,” said Deborah Fuhr, founder of ETFGI.

Actively managed ETFs have registered net inflows of $126bn in the first 11 months of 2021, compared with the $91.1bn gathered last year. New business for ESG focused ETFs has reached $146.8bn following 2020’s record annual haul of $86.9bn.

BlackRock, the world’s largest asset manager, is forecasting that global ETF assets will reach $15tn as early as the end of 2025.

Salim Ramji, global head of iShares and index investments at BlackRock, said the growth of commission free trading for ETFs on digital investment platforms had accelerated the adoption of ETFs.

“Hundreds of millions of people globally can now access ETFs commission-free across major investment platforms in over a dozen countries, often with a few taps on a smartphone,” said Ramji.

Growth of interest in ETFs has accelerated since late March 2020 after the turmoil triggered by the coronavirus pandemic forced the Federal Reserve and other leading central banks to pump liquidity into financial markets via vast asset purchase programmes.

The extraordinary support measures by the Fed and a vigorous rebound in US corporate earnings as lockdown measures were eased have encouraged more investors to use ETFs.

US domestic equity ETFs have registered inflows of about $538bn since markets hit their lows in March 2020, helping to fuel the S&P 500’s rally to an all-time high in early December.

Not all observers welcome the swing to ETFs. Michael Green, chief strategist at Simplify Asset Management, said the huge expansion in assets held in index-tracking ETFs was creating problems by pushing up valuations, increasing correlations between individual stocks and distorting returns across the US equity market.

He warned that the risks of “extreme downside outcomes” were increasing as investors continue to pour money into the US stock market via ETFs.

Vanguard, the world’s second-largest asset manager, warned that the US stock market had not been as overvalued since the “dotcom” bubble in the early 2000s.

It expected valuations for US equities to moderate as interest rates rise in response to inflationary pressures and for US corporate earnings growth to slow. As a result, Vanguard is forecasting that annual returns for US equities over the next decade will sink to between 2.3 per cent and 4.3 per cent.

“This pales in comparison with the 10.6 per cent annualised return [for US equities] generated over the last 30 years,” said Joseph Davis, Vanguard’s global chief economist.

In contrast, Michael Arone, the chief investment strategist for State Street’s ETF business in the US, said that Wall Street’s bull market foundation would “remain strong” in 2022.

The consensus forecast among Wall Street for earnings growth for S&P 500 companies in 2022 is currently running at around 8 per cent. “Should actual earnings come close to those forecasts, it would probably be enough to propel US stock higher,” said Arone.