ETFs close in on market dominance

ETFs close in on market dominance
 European ETF products by asset class

Exchange-traded fund (ETF) assets in the US rose by $133bn (£103bn) in the first three months of this year, prompting one investment bank to predict that passives will account for more than half the US equity market by next January.

The figures emphasise the industry’s rapid growth is continuing to accelerate in the world’s largest investment market, taking market share from traditional fund strategies.

Figures from Cerulli indicate US-based ETFs saw assets under management rise by 10 per cent in the first quarter to almost $2.8trn. 

Organic growth accounted for around half of this figure, in what the consultancy described as a “massive” start to the year once market performance was factored in.

Open-ended funds also attracted a healthy level of inflows over the period, at $84.2bn. 

But separate research from analysts at AllianceBernstein, also released last week, has predicted that ETFs will soon be the dominant force in US markets.

The firm’s Inigo Fraser Jenkins and team, who made waves last August by suggesting passive investing was “worse than Marxism” because of the way it allocates capital, forecast that passive assets will account for 50 per cent of the US equity market by the start of 2018.

Estimates of the amount of money currently held in US active and passive strategies vary. But the AllianceBernstein prediction does rely on a further acceleration of recent ETF growth rates.

“At some point in the next nine months a historic milestone will be passed. More than half of managed equity assets in the US will be run on a passive basis. We forecast this will happen sometime in January 2018,” Mr Fraser Jenkins said. 

“We don’t think there will ever be a reversion back past this point, so from here on the majority of equity assets under management in the US will be passive.”

The prediction excludes investments held by the likes of sovereign wealth funds and corporate treasuries, but emphasise points raised by AllianceBernstein in its ‘Marxism’ research note. These ask whether the rise of passives will start to increase correlations between stocks, and whether their dominance will make investing easier for the remaining cohort of active investors seeking market inefficiencies.

The investment bank added that it expected passives to account for 38 per cent of equity assets globally by the start of 2018.

Earlier this year ratings agency Moody’s predicted passives would account for more than 50 per cent of both bond and equity markets in the US by 2024, with other markets following similar paths. The firm echoed AllianceBernstein in suggesting this rise was unlikely to be reversed.

“Investor adoption of passive and low-cost products will continue irrespective of market environments,” Moody’s analyst Stephen Tu said.

The rise of fixed income ETFs continued in the first quarter of 2017, BlackRock said last week, with net inflows globally standing at $44.5bn. This puts overall assets on the cusp of $650bn.

In Europe, ETFs recorded €30bn (£25.3bn) of inflows in the first quarter of the year, from a total of €123bn in net flows for all products.