ETF investors are increasingly shifting towards higher value propositions including actively managed, thematic, ESG, and crypto asset strategies, according to the latest annual survey conducted by ETF data and analytics provider Trackinsight.

The survey aims to shed light on the needs and concerns of ETF investors globally.

The Trackinsight Global ETF Survey 2022, which was supported by IHS Markit and JP Morgan Asset Management, polled 347 professional investors globally, including some of the world’s largest asset managers, financial advisors, private banks, family offices, and institutions, who collectively oversee $415 billion in ETF assets.

Combined with industry data from IHS Markit, including asset levels, net inflows, and product launches, the research identifies trends affecting the ETF industry and sheds light on the needs and concerns of ETF investors globally.

Trackinsight noted: “If the growth of the last 20 years has been mainly fuelled by the slow but persistent transition from active to passive management, one should not forget that ETFs are not only trackers.

“ETFs represent an incredible opportunity to rethink the value proposition delivered to investors who are hungry for investment purpose and relevant education and advice.

“The complexity of financial solutions and the capacity of the industry to empower investors remains the next frontier.”

ETF Market Overview

Global ETF assets increased from $7.6 trillion to $9.8trn over the course of 2021, while the number of ETFs worldwide surged by a massive 1,457 to reach 8,099.

ETFs are continuing to play a significant role in professional portfolios – approximately two-thirds of respondents invest more than 40% of their total portfolios in ETFs while a little more than half have over 60% invested in the vehicle.

Equity remains the most represented asset class in ETF allocations with an overwhelming majority of respondents (90%) declaring to have some exposure to stocks through ETFs.

Fixed income and commodities follow; however, 13% of respondents registered an intention to reduce their exposure to bond ETFs, reflecting the negative impact that inflation and rising interest rates are having on this asset class.

Notably, almost one-third (30%) of investors indicated their interest in tactical ETFs such as short and leveraged products, almost doubling from last year’s survey where just 16% of respondents said they were expecting to use these tools in the coming years.

When quizzed on their rationale for using ETFs, low costs and liquidity topped the list of benefits with 70% of respondents declaring these factors as important selection criteria. For passive ETF investors, replication quality matters (quoted by 54% of respondents) alongside index methodology (61%).

Active ETFs

While a little over 40% of all respondents still do not have any allocation to actively managed ETFs, Trackinsight notes that this proportion has decreased sharply since 2020 when it was as high as 70%. Yet despite more investors holding actively managed ETFs, these products continue to represent a minor share of portfolio assets with more than two-thirds of respondents investing less than 20% in these products.

Further showcasing how actively managed ETFs are gaining in popularity, the proportion of investors intending to increase their active ETF allocations by at least 5% has risen from 25% to 37% over the past two years.

Investors’ motivations for buying actively managed ETFs differed notably depending on purpose with lower fees being the top priority for investors that were replacing mutual funds, excess returns were top for investors replacing passive ETFs, and diversification was key for those replacing direct investing.

The main reasons curbing further adoption of actively managed ETFs, meanwhile, were found to be the limited range of products (noted as a setback by 59% of respondents), the higher costs compared to passive ETFs (41%), and the lack of extensive performance track records (also 41%). Trackinsight notes, however, that as the actively managed ETF universe grows over time, all three of these limitations are expected to ease naturally.

Thematic ETFs

With 300 new launches, 2021 was a very dynamic year for thematic ETFs. The now 800-strong ETF segment broke through $250 billion in assets at the end of the year, representing a 300% increase in just two years. More than 60% of respondents declared holding over 5% of their portfolio in thematic ETFs compared to just short of 40% in 2020, reflecting how the role of thematic ETFs has transformed from a satellite exposure to the mainstream of many professional investors’ portfolios.

However, the wave of interest appears to be receding as the percentage of investors expecting to increase their exposure to thematic ETFs by more than 20% has fallen from 13% to just 5% over the past year.

Similar to ETFs in general, the most desirable characteristics of thematic ETFs for investors are low costs and liquidity, both being quoted as very important by two-thirds of respondents. More than half (56%) also noted the importance of a robust index methodology, a not unsurprising factor considering that 85% of assets invested in the segment are currently directed towards passive ETFs.

Innovative technology is the principal megatrend captivating the interest and assets of professional investors with 95% of respondents either already invested (77%) or interested in investing (18%) in these strategies. Environmental changes and next-generation economies were also highlighted as interesting trends with 45% and 41% of respondents, respectively, already invested in ETFs targeting these themes. By contrast, megatrends like demographic shifts and rising urbanization leave investors uninspired, potentially because they are less straightforward in their investment focus.

ESG ETFs

While sustainability has clearly become a growing matter of interest for the general public, only half of the survey’s respondents currently invest in ESG ETFs, a proportion that is broadly in line with results from the past three years. Approximately 15% of investors dedicate more than 20% of their assets to sustainable ETFs while just 3% invest more than 60%.

Notably, the survey also uncovered that investors are becoming less inclined to increase their allocation to sustainable ETFs with the share of respondents expected to grow their exposure by more than 20% having been reduced from 23% to just 11% over the past two years.

The most commonly cited reasons stunting the adoption of sustainable ETFs included a lack of transparency in investment processes and the ambiguous impacts that those solutions bring.

However, the survey did reveal that 60% of respondents were inclined to invest in thematic ESG ETFs. According to Trackinsight, thematic ESG ETFs tend to possess distinctly defined investment strategies that help to alleviate the above-stated concerns.

Crypto ETFs

While a relatively new entry to the ETF industry, crypto asset ETFs have already been adopted by around half of the investors surveyed. For most respondents, however, crypto ETFs represent a small portion of portfolio assets with two‑thirds (67%) who are invested allocating less than 20% to the segment.

While nearly two-thirds (63%) of investors expect no change in their crypto ETF allocation over the next two years, a third (33%) are looking to increase the share of digital asset ETFs. Just 4% are planning to lower their crypto ETF allocation.

ETFs are the preferred vehicle of choice to invest in crypto assets for a majority of investors with 55% particularly praising their ability to diversify across the largest coins in a single easy trade.