The types of ETFs money managers expect to increase in popularity

A global survey pinpoints the types of ETFs that are expected to prove popular in the years to come.

Almost half of all money invested in exchange traded funds (ETFs) will be in either active or smart beta products in the coming years, according to J.P. Morgan Asset Management’s (JPMAM) Second Annual Global ETF Survey.

Survey respondents said that they expected nearly half (40%) of all client money they managed to be allocated to ETFs that follow either active or smart beta strategies by 2023.

The survey was carried out among professional investors from a range of financial institutions and regular users of active and smart beta ETFs.

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Overall, investors surveyed said that they expected to see ETFs that use active or smart beta strategies to experience the most growth.

Smart beta ETFs, sometimes called factor ETFs, attempt to adopt “classic” investment styles (such as value, growth, momentum etc), but implemented through a rules-based index. For example, a smart beta ETF will track an index that screens for stocks deemed “cheap” on a variety of metrics such as price-to-value ratio or price-to-book ratio.

Actively managed ETFs, as their name suggests, are ETFs that are actively managed. This means that a manager decides the exact allocation of the ETF portfolio, while a conventional ETF or passive mirrors the ups and downs of an index.

Actively managed ETFs have experienced a surge in popularity in the US lately, in part due to the many benefits of the ETF wrapper in the country, including being more tax-efficient than traditional mutual funds. This is reflected in the J.P. Morgan survey, which showed that investors in Latin America and the US predicted the strongest growth for active ETFs.

In contrast, respondents across Europe and Asia said they expected smart beta and passive ETFs to see stronger growth.

Investors outside the US also said they expected higher growth in the use of ESG (environmental, social and governance)  and thematic ETFs in the next two to three years, compared to both smart beta and active ETFs.

US investors, however, had lower growth expectations for ESG ETFs than investors in other regions.

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Jed Laskowitz, global head of asset management solutions at J.P. Morgan Asset Management, said: “We’re seeing a significant shift in sentiment and in the way investors use ETFs in portfolios. They are exploring their options and increasingly looking to diversify their use of ETFs beyond passive strategies. For example, the current and expected growth in ESG ETFs and active ETFs is proof that these vehicles are likely to play a bigger role across investor portfolios.”