The use of ETFs has grown rapidly over the last few years. In September of this year, the industry reached the milestone of 3,000 ETFs trading simultaneously, up 30% from as recently as December 2020.
This growth has seen ETFs develop from broad index funds into diverse and increasingly specialised investment vehicles. The proliferation of thematic ETFs – based around themes like clean energy and artificial intelligence – has given investors unprecedented choice and led to remarkable adoption statistics. From 2020 to 2021, the combined assets of global ETFs grew from $7.7 trillion to over $10 trillion.
2023 looks set to be another big year for ETF adoption. There are a number of reasons that we expect to see a boom, from cost efficiency to education.
We believe that the cost of living crisis will be a major factor affecting ETF adoption in 2023, both in terms of motivation behind investing and in terms of cost as a factor. We recently conducted a survey of over 1800 of our customers – 60% said that outperforming inflation was a key motivation for investing. With the crisis affecting households on a global scale, the need for more cost-effective investment solutions will grow.
Broadly speaking, ETFs come with relatively low fees when compared to mutual funds or other investment products because tracking an index is inherently less expensive than active management. At InvestEngine, for example, we don’t charge fees on our DIY portfolios, with investors paying only the almost negligible ETF fees.
Awareness is also likely to play a role not just next year but in the years to come. Our survey found that less than half of respondents had invested in ETFs before opening an account with InvestEngine.
This is a situation that will only improve with time. A 2021 survey from Opinium found that 34% of 18 to 34 year olds were invested in ETFs compared with only 5% of those over 55. Despite being around for a while, there is still a level of misunderstanding when it comes to what ETFs are and how they’re used. As an industry, this is something we’re working to change and we hope to see significant strides forward in this regard in 2023.
Chris Mellor, Head of Equity & Commodity Product Management at Invesco, told us: “We expect ETFs to continue growing in popularity as investors new to the structure begin to understand them and existing ETF investors find new ways to incorporate them into portfolios.
“A real game-changer has been the increased availability of ETFs through investor platforms, offering everyone access to investment strategies that were once only available to large institutions. The wide choice of ETFs and the simple way they can be bought and sold can be useful for investors wanting to be more involved with asset allocation decisions. That could be even more critical in 2023 if, as many expect, market conditions evolve to create new opportunities during the year.”
Andrew Prosser, Head of Investments at InvestEngine, agreed, saying: “Both retail and professional investors alike are turning to lower-cost index tracking ETFs as the core building blocks of their portfolios. InvestEngine have seen this rising demand for ETFs reflected in our own growth, with assets on the platform growing by 488% from the start of the year to the end of October – from £17m to over £100m.
“This growth in ETF popularity is likely to continue for several reasons. The increasing number of new entrants into the ETF market, ongoing innovation around ETF offerings, and increased accessibility through a growing variety of distribution channels are all likely to continue to fuel net inflows.
“As well as providing easy access to market returns, ETFs are also proving to be popular options for those investors looking to implement factor-based investment strategies, which target company characteristics associated with higher returns, aim to diversify global market-tracking portfolios through introducing additional types of uncorrelated risks. ESG focused ETFs also continue to be a favoured platform through which investors can express their views, and the sustained innovation in thematic ETFs should provide further support for continued ETF growth.
“In addition, as investors become increasingly aware that asset allocation tends to be a more important driver of returns than individual security selection, they will continue to turn to ETFs as cheap and convenient vehicles for implementing allocation decisions. Finally, their enduring cost advantage over active funds remains a key driver, and should continue to boost ETF adoption regardless of market direction.”
January 2023 marks the 30th birthday of the first ever ETF, the SPDR S&P 500 ETF Trust. Despite the rapid growth in ETF usage over the last five years or so, they’re nothing new, with global assets reaching $1 trillion as far back as 2009.
We expect to see growth accelerate in 2023 for the reasons we’ve outlined. With the average investor becoming more aware of the benefits of ETF ownership both in terms of cost and practicality, we expect the next year to be big for the blossoming industry.