3 Pivotal ETF Trends to Monitor in 2021

By many accounts, 2020 will go down as a year to forget. Those actively monitoring and participating in the exchange traded funds industry may beg to differ because records galore were once again shattered.

Name a watermark that industry observers are often enthralled with, and chances are, it was topped in 2020. Overall assets gathering – the figure was around $510 billion in mid-December – set a new record. Flows to fixed income ETFs also set a new high. Assets added to thematic ETFs also swelled to new heights.

In terms of day-to-day activity, there was plenty of that, too. Approximately 300 new exchange traded products debuted this year, a new all-time high. Likewise, more than 250 ETFs shuttered, also a record and more than double the rate seen a year ago.

All of that is to say picking just a few ETF themes for investors to keep their eyes on 2021 is a difficult task, but here are three that should spend considerable time in the spotlight:

Fixed Income Flows

Even against the backdrop of low interest rates and equity markets that rallied sharply off the March coronavirus lows, 2020 was a stellar year for bond ETFs.

“Bonds also notched gains in November. The Morningstar U.S. Core Bond Index--a barometer of U.S. fixed-income markets--rose 0.96%, as long-term Treasury yields ticked lower and credit spreads tightened,” according to Morningstar research. “Flows into bond ETFs slowed, clocking in at an estimated $15.1 billion. Flows were mixed across fixed-income categories. Investors added money to high-yield bond ETFs and withdrew from government and ultrashort-duration bond ETFs.”

With some assistance from the Federal Reserve's purchases of corporate bond ETFs, five of 2020's top 10 asset-gathering ETFs are bond funds.

Investors are right to ponder the durability of this trend, or at the very least, for how long low yield aggregate bond ETFs will continue packing on billions of assets. Assuming Republicans retain a Senate majority, which will be determined in Georgia next week, that will keep some check on government spending, compelling the Fed to keep interest rates low perhaps through 2023.

With that in mind, it bears remembering that a primary determinant of a bond's long-term potential is starting yield. The lower that yield, the weaker long-term performance can be because prices move inverse of yields. Add all that up and it could be riskier, higher-yielding bond ETFs that steal the show next year.

Thematic Thirst

It wasn't that long ago that some experts said “All of the good ideas are taken” when it comes to ETFs. To an extent, that statement is accurate because, well, all of the good ideas tied to widely followed cap-weighted indexes have been taken.

Good thing economic and societal changes are creating appetite for thematic ETFs and that appetite is strong. Thematic ETFs aren't about some young novice trader throwing money at a solar or small-cap tech fund on Robinhood. This asset class is more about the seismic, landscape altering shifts created by segments such as e-commerce, fintech and genomics, just to name a few. These are durable, persistent trends with the potential to disrupt myriad industries as we know them.

“Thematic ETFs seek to capture investment opportunities in companies or sectors created by long-term structural trends,” according to WisdomTree research. “Examples include demographic and social shifts such as diversity, inclusion and equality; disruptive technologies such as cloud computing; geopolitical changes such as globalization; and environmental pressures such as climate change.”

As the chart below indicates, money is pouring into thematic ETFs at a feverish pace as more of these themes take hold in 2021, that trend could continue and more issuers are likely to bring new products to market in this arena.

Courtesy: WisdomTree

ESG Exuberance

By the start of the next decade, environmental, social and governance (ESG) funds are forecast to be a multi-trillion asset class as more institutional and retail investors alike place emphasis on issues such as climate change, equal pay and more. That asset movement gained significant momentum in 2020.

“This year investors have put a record $27.4 billion into ETFs traded in U.S. markets that say they focus on environmental, social and corporate governance, or ESG, practices, according to data from FactSet, doubling the size of the sector,” reports Michael Wursthorn for the Wall Street Journal.

Old guard ESG ETFs are prosaic in that those funds typically exclude energy, gambling and tobacco stocks, but new ESG funds are evolving and becoming more refined, providing investors with more opportunities to integrate sustainability and virtue into their portfolios.

Data confirm that on a global basis, 71% of asset allocators – including 75% in the U.S. – want to invest in a way that aligns with their personal values. That provides a big runway for growth for ESG ETFs, but issuers likely need to move beyond simply overweighting tech to keep the momentum going.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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