ESG drives thematic ETF interest after record inflows in 2021
Investors increased their appetite for exchange-traded funds (ETF) in 2021, with worldwide inflows hitting $1 trillion for the first time. Those with environmental, social and governance (ESG) themes garnered the most interest.
At $900 billion, inflows for US-listed ETFs surpassed 2020's global total of $735.7 billion on their own, according to Morningstar data.
Over the past two years, inflows into thematic ETFs have surged and now total over $40 billion in assets under management (AUM) across 81 ETFs. These inflows mark a 400% increase from under $10 billion at the end of 2019, according to data from Global X.
"Investor demand for ETFs has seen a tremendous increase over the past year," a spokesperson for New York-based index provider Indxx told AsianInvestor.
"Diversification remains the major driver behind choosing to invest in ETFs, followed by 'avoiding risk through individual stock exposure' and that they 'save time' compared to individual stock picking," the spokesperson shared.
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The boom of thematic ETFs points to ESG dominating the thoughts of ETF investors in the year ahead, according to a joint ETF Stream and Amundi survey.
The survey, ETF Scan: The Big Picture, identified an array of what it described as megatrends that investors aim to tap into through the ETF wrapper.
Some 68% of the 105 investors who responded picked out climate as the No. 1 megatrend they were focused on in 2022; 51% highlighted digitalisation while 49% and 40% pointed to artificial intelligence and cybersecurity, respectively.
The findings of the survey also found that 35% of respondents want ESG exposure linked to either impact or the UN's17 Sustainable Development Goals. According to data from Amundi, ESG accounted for 50% of equity ETF net inflows in Europe and 46% of all fixed income ETF inflows in 2020.
While ESG-themed ETFs, which offer targeted exposure to areas of the market such as clean energy, climate, education and clean water, look set to continue growing in Europe, investors in the Asia Pacific region also want more of these products.
“We see more Apac investors are looking for options beyond active strategies covering ESG and fixed income investments. Factor strategies are relatively cost competitive, making them a good alternative to passive indices and complementary to active,” said Stephen Quance, global director factor investing at Invesco.
“There is clearly opportunity for the factor investing ecosystem to expand and introduce offerings that meet investor needs, for example through ETFs,” he added.
In Invesco’s sixth annual Global Factor Investing Study — based on interviews with 241 factor investors responsible for managing over $31 trillion in assets and published in September 2021 — 46% of respondents agreed that they would be more likely to invest in factor ETFs that incorporate ESG than standard factor ETFs.
However, the study also highlight limitations of this type of investing. For example, 49% agreed that they sometimes struggle to find the right factor ETF for their needs, and only 26% agreed that it is easy to communicate to clients and stakeholders how ESG factor ETFs operate.
"The ease of access to ETFs, promising growth outlook for companies, and increasing opportunity for cross border products, are contributing to the continuous growth of ETFs in this region," the Indxx spokesperson said, citing factors such as the inclusion of ETFs in the Greater China stock connect scheme and the cross-border link between China's Shenzhen Stock Exchange and the Singapore Exchange as reasons contributing to the growth.
"Some of the best companies in Asia are listed in Australia, Taiwan, and Korea," they added. "Several global leaders in healthcare, semiconductor manufacturing, batteries, or niches like bicycle manufacturing, belong to this region, making it a home to promising investment opportunities."
In recent weeks, investors have also been pumping money into other kinds of ETFs, particularly those focused on Chinese equities, according to the Financial Times. This is despite regulatory action wiping more than $1 trillion from the Chinese equities markets since February.
Earlier this year, AsianInvestor reported that 76% of institutional investors from Greater China were planning to increase their exposure to ETFs over the next 12 months.
Last year also saw the launch of several new types of tech ETFs globally, such as Bitcoin and metaverse funds. Korea Investment Management, for instance, in December launched the KIM Navigator Global Metaverse Tech Active ETF, using the Bloomberg global digital media and tech select index as its underlying benchmark.
“With ETFs in Korea focused on the metaverse far outpacing the broader market in Korea, investors have found an investment theme that captures the huge potential of our digital future,” said Seongin Jeong, head of ETFs at Korea Investment Management.
“There are currently only four metaverse thematic ETFs listed in Korea that invest in Korean equities, but only two metaverse ETFs in the whole world that have a global equity universe. We therefore expect this product to receive plenty of attention from investors,” Jeong said.
Cryptocurrency ETFs have also emerged, with the US Securities and Exchange Commission having approved the first Bitcoin-linked ETF in October. Advocates have touted them as more accessible routes to crypto for traditional investors. But reactions from institutions have been mixed as the ETF will inherit the characteristics of the underlying asset, which in the case of Bitcoin include volatility and risk.