ETF trends to watch in 2022: Conversions, international interest and sustainable funds

By DAVID MANN Head of Global ETF Capital Markets at Franklin Templeton Investments

First, I hope everyone had a wonderful New Year – or at least an opportunity to reset and recharge. After two years of living with Covid-19 and the impacts it has had on the global economy, I remain optimistic that things are slowly getting back to normal and that 2022 will see even more of a return to normalcy.

This is my sixth year of giving ETF-related predictions. As I reread some of the prior articles, I noticed the same themes recurring in my predictions: fixed income ETF increases, active ETF adoption, smaller funds getting bigger, etc. For this year, I tried to avoid those themes while also avoiding specific market calls on interest rates or S&P 500 Index end of-year levels (not my forte).

You might rightfully be wondering what is left after omitting all those topics, but rest assured, as there’s still plenty! On to my top three 2022 predictions.

Mutual fund-to-ETF conversions will continue to gain traction

I have repeatedly outlined many of the trading and structural nuances of ETFs that make them so attractive, such as their liquidity, daily transparency, ecosystem, tax efficiency, etc. Judging by the 2021 inflows in the United States, which were within a spitting distance of $1tn, I am not the only one who thinks this way about ETFs.

Last year was the first year we saw a decent number of mutual funds convert into ETFs, most likely for some combination of those reasons I listed above. The 2021 numbers were impressive; I counted 16 mutual funds converted to ETFs last year, with those ETFs having a combined $37bn in assets.

I think both of those numbers will double in 2022, and I would not be surprised if ETFs that had former lives as mutual funds exceed $100bn this year.

Global supply-chain concerns will once again shine a spotlight on international equity investing

To be honest, I am not sure what to make of the recent headlines on the global supply chain as they are all over the place! Within the last couple of weeks, for every article that estimated global supply-chain issues could last a year or two longer, there was another that said everything should be resolved by this summer.

Many of the countries that serve as manufacturing centres within the global supply chain – for example Germany, China, Hong Kong, South Korea and Taiwan – had very different equity returns last year. Chinese equity markets were down almost 25%, while Taiwanese equity markets were up over 25%. German equities were up a little on the year, while those from Hong Kong and South Korea were slightly down.

I may not have a strong opinion on whether or when these supply-chain issues will be resolved, but many investors most certainly do. That makes the ability to have targeted exposure using singlecountry ETFs that much more important. And as for a prediction, I think that we should once again see significant performance dispersion among ETFs that provide exposure to a single country’s equity markets.

Environmental, Social and Governance (ESG)/ Sustainable ETFs will exceed $200bn of assets under management (AUM)

I’m a bit surprised I haven’t previously made an ESG-related prediction. I am bullish on ESG investing and think it will continue to gain popularity. However, before getting to a prediction, I wanted to talk a little about the bigger picture decision-making that goes into choosing an ETF.

Assuming that investors are now comfortable trading any ETF, what should go into the ETF selection decision, especially given all the index and active ETFs available? I like to look at the two extremes of the index/active ETF spectrum (barbell/hourglass). If your goal is simply to have exposure to a given market, then going with the lowest-cost index ETF makes a ton of sense.

On the other end of the spectrum, active management is a great option if you are looking for a specific portfolio philosophy (and management fee screening becomes less important.) I think ESG is a philosophy that can add value on both ends of the ETF selection spectrum. There are low-cost ESG index funds that provide broad market exposure with an ESG tilt.

Furthermore, you can also find bottom-up active stock-picking with the addition of ESG screens. As options on both ends of the spectrum continue to grow and investors appreciate that they can maintain diversified exposure with an ESG screen, the environment appears ripe for significant asset growth. I estimate that 2021 closed with about $126bn of assets in sustainable ETFs (which includes ESG and non-ESG funds) with $38bn of inflows in 2021. I think we will easily beat that number in 2022 and close the year well over $200bn.