Passive shift pushes ETFs to a new level

Moves from active managers may be too little, too late

Passive shift pushes ETFs to a new level
Active managers seem to be shaping up performance-wise this year, but it’s done little to help them against ETFs, which broke past US$4 trillion in global assets in April.

Data from global research firm ETFGI shows that there are now almost 7,000 exchange-traded products managed by 313 providers with a total of US$4.002 trillion, reported the Financial Times.

As ETFs press their advantage, the asset-management industry continues to suffer outflows, particularly those segments most vulnerable to ETF competition. One example is US-listed investment groups, which have fallen behind the broader market since the end of the financial crisis despite gains in their assets under management enabled by rising markets.

“The active-asset-management headwinds aren’t abating,” Morningstar Head of ETF Research Ben Johnson told the Times. “It’s not about performance any more. It’s structural.”

April brought a record US$37.94 billion worth of net inflows to ETFs, making it the 39th consecutive month of flows into the space. Year-to-date inflows amounted to US$232 billion, nearly three times as large as last year’s record of US$81 billion.

BlackRock’s iShares was the biggest draw for ETF investors, attracting US$23.49 billion in net inflows. Vanguard took second place with US$10.29 billion, followed by Schwab’s US$2.53 billion.

Few analysts expect any deceleration. One recent call from Sanford Bernstein, a research house owned by New York-based global asset manager AllianceBernstein, predicted that more than half of the equity assets under management in the US will be passively managed.

Active asset managers still have some fight left. With the global economy showing signs of recovery and new stock-market highs enabled by the new US administration, a more fertile environment is developing for human stock-pickers.

Numbers from Bank of America Merrill Lynch suggest an active comeback story. In April, 63% of large-cap fund managers that invest in blue-chip US-based members of the S&P 500 index outdid their benchmarks — the best beat rate since February of 2015 and the 25th best month of performance in the past 26 years.

Still, investors are not stopping their migration to passive investment. The stampede into ETFs has been most pronounced in the US. The Investment Company Institute, a US association of investment firms, reported end-of-March ETF assets of almost US$2.8 trillion, compared to the US$16.9 trillion for the mutual-fund industry in the country. One year earlier, the numbers were at US$2.1 trillion and US$15.7 trillion, respectively.

The investment industry is still benefitting from healthy profit margins, but some are predicting a wave of belt-tightening and consolidation due to various forces — including investor appetite for lower fees.

“We now live permanently in an environment where clients are far more attuned to fees than before. And rightly so,” State Street Global Advisors CEO Ron O’Hanley told the Times. “We get paid by assets under management, so the tripling of the S&P 500 has done wonders for fee revenue. But at some point that goes away.”

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