In the year Despite difficult market conditions in 2022, asset flows into exchange-traded funds this year have been impressive.
Among the four major categories of stocks, bonds, real estate and commodities, only commodities have made substantial gains. But the U.S. ETF market was empty at $588 billion, according to data from Bloomberg Intelligence. By comparison, mutual funds saw almost $1 trillion in asset outflows.
Looking ahead to 2023, what will drive the upward trend in ETF assets? How can the ETF industry ensure it is positioned for growth? And how can financial advisors help their clients spend money?
Focus on distribution
Innovation in the ETF industry is widely respected, and few areas on Wall Street can beat ETF innovators when it comes to innovation. But the industry seems to have mistakenly believed that it could beat the resource-gathering competition by reinventing the way it thrived for centuries by producing new products.
Years ago, Vanguard founder John Bogle rightly observed, “Mutual funds are born to die.” The same can be said about ETFs.
This year, ETF liquidity has risen by 132%. If we include 2022, 780 ETFs have been liquidated in the past five years. This figure is 26 percent higher than the current ETF market of 3,030 listed funds.
Another 71 ETFs are at risk of being kicked out at any time due to poor performance and anaemia, ETF Global said. Among this unfortunate group are ETFs with sophisticated investment strategies. We hope the ETF issuers behind these products understand that innovation alone does not generate asset flows or guarantee success.
Go where the money is
You may have heard the joke about why criminals rob banks. Because that’s where the money is!
The joke may also be about ETF providers, or at least it illustrates one of their pain points: If their products have the funds, many distribution channels are missing. Unfortunately, as the industry focuses on creating new investment concepts, the critical role of ensuring that products are available to all investors, especially retirement savers, has been neglected.
How can people benefit from the financial innovations of ETFs if they can’t find ETFs in their workplace retirement plans? How can financial advisors deploy such funds if the funds are not in 401(k)s and 403(b)s?