Market Views: Will ETFs extend their winning streak in 2024?

ETF demand surged in Asia in 2023. Will investors continue to bet on this investment vehicle this year and if so, what will be the key drivers?
Market Views: Will ETFs extend their winning streak in 2024?

The exchange traded funds (ETF) industry hit a significant landmark in 2023, with assets exceeding $11.5 trillion worldwide.

This milestone capped a year of impressive growth, with a 24% increase from the $9.26 trillion at the end of 2022, according to independent research firm ETFGI.

The industry's robust performance was highlighted by net inflows of $176 billion in December, contributing to annual net inflows of $938 billion—this stands as the second-highest figure on record, following the $1.29 trillion peak in 2021.

These figures also mark the 55th consecutive month of global net inflows, indicating persistent investor confidence in the ETF market.

The positive momentum in December has been partly attributed to the Federal Reserve’s decision to hold interest rates steady, with indications of potential reductions in 2024, which was well-received by the markets, particularly in the US.

In addition, the ETF industry in the Asia Pacific region, excluding Japan, saw a dramatic increase, with assets rising to over $1.1 trillion by the end of 2023 from $579 billion at the end of 2022.

AsianInvestor asks some of the world's leading ETF providers and strategists for their outlook on investor demand and the factors influencing their predictions.

The following responses have been edited for brevity and clarity.

Thomas Taw, head of APAC iShares investment strategy

Thomas Taw,

Asia-Pacific ETF volumes reached record levels in 2023 at nearly $4.6 trillion, up from $3.1 trillion in 2020.

Demand will continue to surge this year. This is because ETFs are meaningfully increasing access for millions of people in the region – from first-time investors to professional wealth and asset managers – to access all kinds of markets more efficiently, more transparently and more conveniently than ever before.

What we have seen in market after market, is that when we make investing easier and more affordable, more people invest, and they increasingly choose ETFs.

We have seen this play out across the region, from Australia (ETF AUM grew 33% in 2023) to Japan (individual ownership of ETFs increased 15%), Hong Kong and Singapore – all markets where iShares have led in introducing innovative products at the best possible value, catalysing the adoption of ETFs. 

We expect assets in ETFs globally to reach $25 trillion by 2030, with a significant part of the growth coming from Asia Pacific.

In terms of product demand in 2024, we believe that the record flows into fixed income ETFs that we saw last year (bond ETF assets crossed $2 trillion in 2023) will continue, particularly as interest rates are expected to come down and make cash less appealing. 

In the new market regime of higher volatility, investors are using ETFs to take a more nimble and granular approach to asset allocation in portfolios.

Frank Koudelka, global ETF product specialist
State Street

Frank Koudelka,
State Street

As the largest global administrator and custodian of ETFs servicing close to 50% of assets under management, State Street has a front row seat for the trends in the ETF marketplace. We’ve coined the phrase ETF 3.0 to describe the most recent phase of growth we’re forecasting.

ETF 1.0 was passive, ETF 2.0 was smart beta and ETF 3.0 is actively-managed. Each phase of growth has been an accelerant to broadening issuance by asset managers and adoption by investors.

Our view for 2024 is a continuation of this trend. The rationale for this thinking is a realisation by issuers that ETF is a more efficient and less expensive delivery mechanism to bring investments to every kind of investor.

This most recent trend regarding actively managed ETFs is expanding for three reasons:

1) Global regulators have been refining rules to enable active ETFs in its market;

2) Issuers are converting existing unlisted mutual funds to listed ETFs; and,

3) Markets have adopted or have filed to adopt leveraging an ETF share class model.

As a result of this trend, we are predicting that active ETFs will have another record year and exceed $200 billion in net inflows, while the overall ETF market will have its second year of over $1 trillion in net inflows during 2024.

Philippe El-Asmar, head of APAC ETFs
JP Morgan Asset Management

Philippe El-Asmar,
JP Morgan AM

ETF adoption continues to increase globally and across APAC, as investors become more comfortable with the transparency, daily liquidity and attractive fee proposition.

The stellar growth is expected to accelerate globally and APAC could see even stronger growth momentum. We expect APAC ETFs to grow at a rate of ~25% (vs ~15% for global) or double in size every 3 years (vs every 5 years for global).

The growth trajectory is particularly strong in markets like Taiwan and China. Currently the second largest ETF market in APAC, China is likely to become the largest with $1 trillion in AUM by 2028.

In addition to locally-listed ETFs, APAC investors continue to allocate into European and US listed ETFs to gain global exposure. In 2023, our APAC ETF business saw a 80% year-on-year increase in flows driven largely by the growing adoption of active ETFs.

Active ETFs are one of key growth drivers in the ETF industry – in fact they are growing at a much faster rate (~37%) than ETFs overall (~15%).

As one of the world’s largest active ETFs managers by AUM and the manager of the world’s largest active ETFs, we believe active ETFs represent a natural evolution for the ETF industry and will drive the next leg of growth for the broader industry at large.

Wei Li, fund manager, multi asset quant solutions
BNP Paribas Asset Management

Wei Li,
BNP Paribas AM

ETFs are set to see continued strong demand in 2024. Several factors are expected to support robust ETF flows.

The artificial intelligence boom is gaining steam and is projected to become a $1.3 trillion global industry by 2032.

As AI adoption accelerates, ETFs targeting AI-related themes and companies could swell to an estimated $35 billion in assets by 2030, more than doubling from current levels.

Over the next decade, an estimated $1 trillion to $1.5 trillion is expected to flow from mutual funds into ETFs as fund companies launch clones, convert mutual funds, or introduce ETF share classes.

This transition cements the ETF as the foremost vehicle for 21st century investing, with structure incentives pulling assets across to new entrants innovating in the space.

Demand for actively managed ETFs is gaining momentum.

Fuelled by legacy fund company conversions and new investor interest, active ETF launches set records in 2023 and garnered over 20% of net inflows, which has inspired more launches of actively managed ETFs.

This trend indicates that investors are increasingly open to paying for active management within the ETF structure.

Cryptocurrency investments are also drawing rising demands from both institutional and retail investors.

The recent approval of the spot bitcoin ETFs by the SEC in the US could potentially catalyse a global flow of $30-70 billion into crypto ETFs within a year of their launch as they provide accessible, liquid, tax-efficient exposure for investors.

Finally, thematic ETFs with focused environmental or other sustainable exposures could continue attracting assets from investors seeking targeted plays.

Clear growth areas tied to renewable energy or climate solutions may continue engaging certain investors.

Overall, the combination of strong thematic growth areas and shifting landscapes in investing point to another dynamic year of ETF adoption across diverse market sectors.

Marcus Weyerer, senior ETF investment strategist
Franklin Templeton

Marcus Weyerer,
Franklin Templeton

Our outlook for ETF flows in 2024 is optimistic, driven by increasing adoption rates from both institutional and retail investors.

If equity markets remain robust, we are confident we’ll see new records in 2024 both for AuM and net flows.

The appeal lies in the simplicity, transparency, and cost efficiency of the ETF wrapper.

As the US economy faces a potential slowdown and an avalanche of elections keeps markets on edge, investors are likely to prioritize flexibility and liquidity.

The ETF structure can be the vehicle of choice.

With global policy rates reaching their peak, Fixed Income ETF flows may yet again outpace flows into equity products.

We expect actively managed fixed income ETFs to gain traction, allowing investors to outsource navigating the tricky rates trajectory and potentially generate alpha.

Longer duration strategies and a focus on higher credit quality are likely to attract significant attention.

On the equity side, investors may shift towards higher growth regions, particularly in Asia, where supportive secular trends, such as growing populations and infrastructure upgrades provide a positive departure from the difficult global outlook.

Selectivity in market choices will continue to gain importance as growth dispersion prevails.

Alex Chiu, senior strategist, ETF business
Value Partners

Alex Chiu,
Value Partners

We expect the ETF market, particularly in Asia Pacific, to see robust growth in 2024, with strong inflows driven by increased adoption of ETF usage in China, India, and Southeast Asia across retail and institutional channels.

We have seen strong interest in high dividend equity ETFs in 2023, which is expected to continue into the new year.

Demand for thematic and sector ETFs, especially in the innovation and technology sectors such as electric vehicles, robotics, and digital assets, should also continue to grow, given the structural trends in technology and sustainability.

Specifically, the approval of spot bitcoin ETFs in the US paves the way for similar products to be launched in the region, such as in Hong Kong, where the regulator has given a greenlight to such products.

Elsewhere, we are also likely to see more actively managed ETFs getting launched in 2024 as investment managers look to diversify their distribution channels.

The increased flexibility and liquidity to access fund managers’ alpha capabilities are likely to be welcomed by investors as well.

However, we believe flows into plain vanilla index-tracking equity ETFs may moderate, given the crowded and saturated market, while the heightened geopolitical and economic uncertainty may also dampen investor confidence.

Chris Pigott, head of Asia exchange-traded fund services
Brown Brothers Harriman

Chris Pigott,
Brown Brothers Harriman

APAC investors use of ETFs is expected to grow in 2024 driven by new product strategies and investment exposures being deployed within the ETF wrapper.

Two focuses of ETF issuers in the region are increasing opportunities to list actively managed ETFs in new Asian markets and the ongoing momentum of thematic products.

At the end of 2023, active ETFs accounted for 6.4% of global ETF assets, but a remarkable 19% of net flows during the year.

As an increasing number of ETF investors globally are allocating to active strategies, regional regulators are allowing these products to be launched locally for the first time. 

The first active product in Japan launched in September and Singapore will be listing their first active ETF at the end of January. 

Technology remained a theme in demand from investors across the region in 2023 with expectations for ongoing investor interest in thematic products this year.

Cryptocurrency is another theme that has been gathering attention with many ETF issuers closely following the spot bitcoin launches in the US.

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