SSGA Chief Business Officer Anna Paglia, Chief Investment Strategist Michael Arone, and Citigroup ETF strategist Scott Chronert expect the rise of active management, highly targeted funds, and a new macroeconomic regime to significantly change how the ETF industry will add another $10 trillion in global assets in the coming years.
On Wednesday, the trio spoke with reporters in an event previewing SSGA’s upcoming 2024 ETF Impact Survey, which is due for release on Monday.
A New Decade for Active Managers, Alts
Chronert argued index equity funds dominated the post-great financial crisis era as low interest rates and stubbornly low inflation allowed U.S. stocks — the "Magnificent Seven" in particular — to reach soaring valuations.
But the COVID-19 pandemic, years of inflation above the Federal Reserve’s 2% target, and some of the highest interest rates in decades are threatening that tech-heavy investing regime. Chronert believes a world with higher interest rates and more prevalent inflation will create more space to carve out niches in a more dispersed and volatile environment.
“That should open the door to active management,” he said.
BlackRock also expects a renaissance for active ETFs after recently projecting that global ETF assets will rise to $4 trillion by 2030.
The panel also expects ETFs holding alternative asset classes in the coming years, particularly after the Securities and Exchange Commission cleared spot bitcoin ETFs to trade after more than a decade of resistance and more recently cleared exchanges to list ethereum ETFs.
More Retail Demand, More Targeted Model Portfolios
While the percentage of retail investors using ETFs has grown over time, Paglia said retail investors are the next group the industry needs to reach. In the 2022 edition of the State Street survey, 90% of retail investors knew what ETFs were, but just 40% said they owned ETFs.
Those figures come after decades of convincing institutional investors that ETF infrastructure is resilient to market shocks and educating financial advisors on the various benefits ETFs carry for their clients.
"To further grow the ETF pie and bring in more retail investors, education is paramount,” said Todd Rosenbluth, VettaFi’s head of research. “There are lots of great products but investors need to understand how they can help them achieve their goals through diversification and staying the course."
Paglia told reporters that the relative ease of buying and selling ETFs means retail investors can quickly cycle through high-conviction managers if their market outlooks change. After the event, she told VettaFi that financial advisors managing clients with long time horizons would benefit from more targeted model portfolios that use emerging technologies to hit specific strategies.
“I don’t think the fundamentals of how investment advisors will tend to their clients is going to change, but technology is going to help them address more problems,” she added.
Inheritance
The panel said the expected wealth transfer between baby boomers and younger generations — projected by Cerulli Associates to be worth $72.6 trillion through 2045 — will divert potentially trillions of mutual fund assets into similar ETFs.
This is in part due to younger generations' acceptance of electronic trading. Paglia also noted that younger generations are more likely to switch jobs, meaning there are more opportunities in their lifetimes to move into plans that use ETFs or invest in the wrapper with their IRA accounts.
Rosenbluth agreed with that prediction.
"Low-cost broad market ETFs like [the SPDR Portfolio S&P 500 ETF (SPLG)] will remain at the core, but the growing wave of risk mitigation or income-oriented ETFs will help investors tailor their portfolios to meet their objectives,” he said.
“Core + Satellite” Portfolios
Another major call from Chronert: the fall of the style-size three-by-three matrix for equities, replaced by portfolio constructions based around a “core” of low-cost index funds and “satellites” chasing specific investor goals and preferences.
“The building block element that ETFs give you is the opportunity to very uniquely structure a customized portfolio around when you see opportunities,” he explained.
Watch the entire video here.
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