ETF trends to watch in 2022: Crypto, taxes, and active

Nov 18th, 2021 | By | Category: ETF and Index News

By Nicholas J. Elward, Senior Vice President, Head of Institutional Product and ETFs at Natixis Investment Managers.

Nicholas J. Elward, Senior Vice President, Head of Institutional Product and ETFs at Natixis Investment Managers.

Nicholas J. Elward, Senior Vice President, Head of Institutional Product and ETFs at Natixis Investment Managers.

Every year in Q4, the ETF team at Natixis Investment Managers likes to look back on the year and adapt learnings into predictions for the year ahead. Here’s what we learned.

2021 proved to be an interesting year in more ways than one. Can anyone say crypto ETFs or massive ETF inflows?

Within this strong ETF sales, we saw the very positive news of a dramatic increase in organically driven active ETF sales as well as mutual funds converting their assets into ETFs.

However, this positive news was counterbalanced with some important new vehicle risk considerations to contemplate.

With the fluidity in the ETF place and some unknowns, we expect 2022 to be even more exciting. Here are three trends we’re watching closely.

Cryptocurrency ETFs: With increased investor interest in cryptocurrency and with the 2021 US launch of a futures-based bitcoin ETF, we predict US regulators will begin allowing spot cryptocurrency ETFs to come to market. By “spot,” we mean an ETF that invests in cryptocurrency coins and not just futures contracts that are intended to closely track spot prices.

We also expect additional futures-based cryptocurrency ETF launches to move beyond bitcoin. Specifically, we expect ethereum futures-based ETFs as soon as there is a deep enough options trading market.

Lastly, we are likely to see the launch of active diversified cryptocurrency ETFs – those that make decisions on which coins to own at any given time with the intention of providing returns in excess of a diversified cryptocurrency index.

Over the long term, we believe investors will treat cryptocurrency products similar to any other investment choice within the liquid alternative bucket of their portfolios.

Continuation of ETF tax efficiency: There’s been speculation that US Congress may eliminate ETF’s ability to utilize the creation and redemption process to minimize taxes for investors. As certain members of Congress look for ways to pay for the recently passed infrastructure bill – and with the spending bill still making its way through the house – these members view eliminating the ETF tax benefit as a great revenue generator.

While this may be true, it would also mean higher taxes on everyday working Americans. Upon taking office, President Biden pledged not to raise taxes on Americans earning less than $400,000 per year. In direct contrast to that pledge, eliminating ETF tax efficiency would effectively raise taxes on millions of middle-class Americans.

Therefore, we expect Congress will find other sources of funds to pay for their spending initiatives.

Explosive growth of active ETFs: Active ETFs had approximately $200 billion in assets at the end of 2020. We believe active ETF assets will double by the end of 2022 to $400 billion. Three factors are driving this increased interest in active ETFs:

  1. Increased market volatility
  2. Active semi-transparent ETFs becoming more widely adopted
  3. Mutual Fund to ETF conversions continuing

ETFs have liquidity benefits in times of volatility, and increased fluctuations in the market have driven more investors to active ETFs.

Similarly, active semi-transparent ETFs first launched in 2020 and have already driven notable assets in the active ETF space. These innovative ETFs enhance the existing ETF chassis which frees portfolio managers from the requirement of disclosing daily holdings.

This year saw the first conversions of mutual funds to ETFs which allowed issuers to enter the ETF market with size and an existing track record. We believe 2022 will only hold more explosive growth in this asset class, especially when combined with more launches of active semi-transparent ETFs and active ETFs being favored by investors amid higher market volatility.

This year was a rollercoaster for the ETF market with the first futures-based crypto ETF launching, the change in the Presidential administration, and the explosive growth in active ETFs. In 2022, we believe the fear of losing the ETF tax benefit is vastly overblown, we expect continued cryptocurrency product momentum as the broader world embraces digital assets, and we are confident inflows into active ETFs will continue to skyrocket.

(The views expressed here are those of the author and do not necessarily reflect those of ETF Strategy.)

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