This article is by Bloomberg Intelligence analysts Shaheen Contractor and Eric Balchunas. It first appeared on the Bloomberg Terminal.
Launches could double vs. 2019 and as competition and fee pressures increase, unique strategies at low costs will be key. Active ETFs are increasing and new launches could see a boost by catching a rally out of the gate.
Increased flows help ESG ETFs maintain steady asset bases
Despite the coronavirus-driven drawdown, assets in ESG and values-based ETFs remained steady at over $86 billion. ESG ETFs saw a relative outperformance with the largest contributor to its steady asset base being consistent flows – over $16 billion. Low-cost funds will continue to drive growth. A large reason for increased flows is BlackRock moving its ESG ETFs (such as iShares ESG MSCI USA ETF, or ESGU) into its own portfolio models, something that might not represent organic market demand.
Assets are calculated by summing up share class assets. Such ETFs consider ESG factors, employ exclusionary screens or have thematic focuses like gender.
ESG, values-based ETFs and assets
North America closes gap with Europe driven by increased flows
Although Europe has been a traditional leader in ESG and values-based ETFs, North America could continue to close the gap, due to increased interest. Flows to North American domiciled funds overtook Europe for the first time in Q1, resulting in assets increasing 11% vs. 2019 while falling 3% for European funds. Competition and fee pressures have intensified across regions. Along with the impacts of the downturn, this will lead to smaller expensive strategies getting crowded out, unless they outperform and funds see adequate demand. The small nature of funds and an overcrowded U.S. market will add to liquidation pressures.
Assets are fairly consolidated with market leaders, BlackRock, Vanguard and Invesco accounting for over 60% of assets in the U.S. and BlackRock, UBS and Societe Generale accounting for over 70% in Europe.
ESG, values-based ETF assets by fund domicile
New fund creation might double this year if pace continues
ESG and values-based ETF creation accelerated in Q1, with 40 funds being launched or rebranded. If the pace continues, new launches for 2020 could almost double vs. 2019. Large managers with low-cost structures will continue to drive down fees with the median for 2020 launches reaching 0.23%. An increase in fees to 0.3% in 2019 due to the launch of multiple active ETFs and complex themes serve as a reminder of the challenges that small, complex themes face. Along with the jump in fees in 2019, the liquidation of multiple high-cost thematic strategies, such as diversity was prominent, with most charging more than 0.6%. As the market moves toward low-cost strategies, such complex and expensive themes may struggle to gather assets.
ETFs created, median fees by year of inception
Thematic active ESG ETFs add flexibility and costs
The current market could give active ETF launches a boost by catching a rally out of the gate. Active ESG ETFs have been increasing over the last two years with five new funds launched in Q1. Such ETFs allow for more flexible strategies but add to costs. Flexibility could gain in importance as asset managers differentiate themselves in what is evolving to be an increasingly competitive marketplace. As large asset managers with low-cost structures put pressure on fees, unique strategies at a low cost may become key for growth. While such new thematic strategies can support expansion, they’ll add to analytical challenges amid an increasingly diverse array of products.
BMO Global Asset Management and JP Morgan are among asset managers with active ESG ETF strategies.
Active ESG, values-based ETFs
