The 2022 ETF Outlook

level what what are some things that you're you're thinking about? Yeah, so in in b I they make us or they we should do it. They do make us though right outlooks and uh, you know, we look you look forward. A lot of it is just repackaging the past into the future tents. I'll be honest. I mean that's what

a lot of self side research does. We don't make calls like this will go up or down, but what we do is try to highlight the biggest themes that we think have a lot of legs or basically come against themes that may be overhyped and so are big theme for next year is simply that E t F s are transcending the passive label so that goes into how much there's been in flows into active discretionary active ETFs, E s G, smart beta, UM, all kinds of you know,

I call them shiny objects, but even things like simplify, which uses derivative the sculpt outcomes. Um, most of the innovation is happening there so and and also bitcoin as so is the tent gets wider and wider, and people put more stuff into e t F that isn't just sort of cheap beta. That's good UM. And we think that gives the industry a lot of growth because it's so accepting and big tennis. And that's our general theme

for next year. And the reason we went there is because basically almost every e t F took in money this year. I mean you almost had to try to not get flows. That's how much the fish were biting. It was like a lake that was just oct with a bunch of hungry trout. Um. And that's just the kind of year it was. And I've never seen anything like it, and I've been covering this for fifteen years. So within that optimism is a bunch of things that I think will break down the podcast, but that's our

general take on it. Is we we really see this sort of growth continuing. Okay, So joining us in this big tent. Todd rosen Bluth, who's a senior director of et F and Mutual Fund Research at CFR, A a regular on the podcast, as well as Katie Greifeld, another regular in favorite on the podcast, who covers e t F for bloom Broke News and is also a regular Quick Tax, this time on Trillions. Todd, Katie, welcome back to Trillions. Great to be with you. Thanks, thanks for

having me. Okay, so we're gonna walk through some of Eric's key research points, and I would also encourage you let's pick him apart as much as possible. So Eric, first of all, you want to talk about flows, right because this was a one was a huge year for flows into e t F. How just how big was it and and what do you think about? Yeah? So, uh, we're we're looking at about nine billion this year. That's I think we're it's going to end up. Um, you know,

we're still two weeks away, but that's probably where will be. Now. That is what's the percentage more than the old record which was set last year with about that's a big deal. That's not just breaking the record, that's completely obliterating it. And you know, a couple of things account for this.

You obviously there had other areas of the market that did well breadth, so you had value, small cap emerginga tips, A lot of things really woke up this year that weren't just say like you know, fang stocks and and and cheap data, although that takes the lion shares of the flows still, so you had the sort of ancillary areas of the market doing well. But you also just have more and more innovation happening. So many people are putting their best ideas to work in the t F

world and and that will that route that pay. So next year, what do I think in flows? If you asked me to pick, I would say probably a little less. I can't imagine the market returning again, So maybe we have a flat year or a tougher year, and I think the flows are good. Maybe maybe they're back to half a trillion something like that. That would be my my early guests into where the flows will be. But again, that's still a monster amount of growth, especially considering not

many of the things are taking in cash. So should I jump in and uh? Put Eric Speed to the fire. So going back to half a trillion, that's still an enormous amount of money. It would still be an enormous reduction from what we're seeing this year. I mean, do you really chalk up the fact that we're going to get nine hundred billion dollars just to the fact that the SMP five hundred and was so strong. Yes, so ets taken I think two billion a day baseline. I

think just the vehicle is so popular. I think, you know, one to two billion come in just because people are are experiencing a format change. Most new money now goes into e t f s. It used to go into mutual funds. So I think that's just the baseline. And then this year it took in four billion a year. So the other two billion I think a little more market dependent. The thing is, if the SNP were flat, right, something's going to be working. I remember, like it was

two or three years ago where nothing was working except cash. Well, short duration bond ETFs took in a ton of money. I think people sometimes equate e t f s with the SNP or equities, but they cover everything, even stuff that goes up when the markets down. So I think we we will see those flows. I agree that if the stock market really is this sort of like the star player of the E t F worlds, like you know, lebron or Steph Curry of their team, and when equities

are tough, that will minimize the flows a bit. But I still think those other reasons they'll be up there, you know, so maybe maybe the pace will come down a bit though, Todd, what do you think up or down? Well, I think it's gonna be up from the record we had last year. I think it's going to be between five hundred billion and a trillion hours. Where exactly that is is going to be dependent upon the stock market.

Just to put some numbers behind what Eric was talking about, the three heavyweights within the space, I, vv v O and SPY are going to have taken in a hundred billion dollars. That's the first time they will have done that ever or anything close to that ever, and yet close to eight hundred billion dollars. It's going into things that are not directly tied to the SMP five hundred, either they're a slice of that or there fixed income.

We saw tips explode this year, you know, given that investors have a chance to go wherever the puck is going using e t F. So I think we're gonna see it in an amazing year off of a very single digit level returns to the SNP five. Okay, so one thing that I thought was a curiosity a little bit was that, uh, that number for one actually excludes mutual fund to E t F conversions, which eric how

big was that number? So if you count conversions that happened or announced, it's about fifty seven billion, and it's about two funds so far. But again, if we go back to this time last year, it was zero and zero. So I think that's superseded everybody's expectations. I noticed a lot of times when a conversion happens, there's this sort of like minimizing it, like, oh, well, it's just that one firm who has that one tax fund, and don't worry,

this won't be a big deal. And then you see JP Morgan, and then you see Franklin, and then you see Motley Fool and then you see a cannabis fund. It's pretty widespread. We think there'll be a trillion dollars with a conversions in the next ten years. I think you could be even greater than that that said, it won't be everything. That would be ten of mutual funds converting. But that's where we're at now. And if we count the fifty seven billion, you do get it closer to

a trillion. But most services I know todd might be different. Don't count conversions as flows as of now. They just show up as assets and ETFs not flows. So a trillion dollars in ten years, I mean, if you think of the realm of the mutual fund universe, isn't it about twenty one trillion dollars? It's huge? I mean, why would why only a trillion? Why stop there? What is preventing every single mutual fund from converting into an e t F given that's clearly where the direction of travel is. Yeah,

a couple of reasons. One is, uh, the revenue over there is so good, and when you convert to an e t F they may just not They fear self cannibalization. They also with a four one case, it gets a little trickier with logistics, if not impossible. So for mutual funds that have deep four when K penetration, it's tough to just automatically have all those four when K plays have an e t F instead of a mutual fund.

They're not bought similarly, So there's logistic but I think some of those logistical issues will be overcome and solved. But I you know, I thought a trillion was when you make predictions, it's good too if you, especially if you're contrarian, to go as low as you can while seeming bold. That way, you can easily overcome it. So like a trillion if you if you take the vibe out there. You know, back in July when I predicted

it, it it was only like five billion new conversions. People were like, that's crazy, But it's more and more come in. It seems like I'm under selling it. So I agree with you. I think it could be way more, but might as well be right by a lot than like overshoot. Have you seen prices right when they bid like one dollar over? You gotta like have that mindset with these predictions. You know, you don't want to overdo it. Bitcoin people do that sometimes, you know, they're like, oh, it's going

to a million dollars. You're also supposed to put your pinky into your lip and say one. Well, don't forget guys, that's the name of your of the podcast here. You guys called this because speaking each capation trillion just connected to this podcast that Wait, you mean the name that Joel gave the podcast like five years ago. Yes, and I remember being one of the early things to it about five years ago. Yeah, yeah, no, it was, it was.

It was a good name. Then we try and think big. Um. Okay, I want to talk about another big thing, another theme in the Bloomberg Intelligence two outlook for e t s. E t f s have long been known for for a path with a passive context, and obviously there's been increasing amount of active, actively managed gtfs. Uh but Eric, you and you tease this already, but there's a whole new paradigm and organization that you're thinking about. What what

is that? Yeah, I mean shiny objects some that I mean that's my turn for it or hot sauce um. You know, a professional institutional manager might call it funds with high tracking error. But it's just basically stuff that's completely different than you're boring beta e t F like v O O or v T I. And why is that? Well, most people own a very a very boring core, and but in order for that core to work, you've got to not touch it. So I think there's this market

to enter too. To entertain yourself, take speculative bets that could have asymmetric returns that are pretty high, like a call option, and you decorate your boring vanilla with these sort of outlier hot sauce funds, either like an ARC or a theme et F or crypto. Crypto is a perfect example of hot sauce. Or you do call option trading on robin Hood and this is so you just distract yourself from the vanilla. So I called the Barbell era,

and I think we're in it. And I think that's why you don't tend to see outflows from these crazy, wacky, high flying ets when they go down, um like people think they would see outflows. They tend to be pretty sticky thoughts. I'll do the I agree with Eric, and then I'll do with the I disagree with Eric. So I agree with Eric. I do think that that's how these products are are happening. So thematic ETF, you know,

active as well as index space. Thematic ets were actually surprisingly popular h despite the fact that we saw so many of these themes underperform cannabis, blockchain, cloud computing. So many of these technology oriented themes underperformed, but money kept going into these products from global X among others, so in part because they round out a portfolio that's tied to the S and P five. But I do think that we're going to see active core. I think you

know a key player that's coming is Capital Group. They're going to be launching their first suite of active equity e t s and they're gonna be not the mutual funds that we know of from American funds, but they're going to be similar enough to those, and those are core oriented strategies. They're just going to be actively managed by an experienced team. I think we're going to see that do well. Oh now this could be a bet. Okay, So we talked to Capital Group. I give them credit.

They're like, look, we're going for the core. We're going at Vanguard. We're trying dislodge them. We believe active has a place in the core, you know, God bless them. I think they'll fail dramatically. I think that nobody is going to sell a three basis point beta e t F for for that. I think those days are over. Even if they come in as low as they'll probably we have some success because they have clients that know

them and like them. So maybe there's a little bit, but I don't see that as this is a good bet for us. How about over under after one year for Capital Group, I'll go with seven billion. I'll take you wouldn't take the over on that. That's that's the number you want to go with. You don't want to go lower if you're that pessimistic. The seven billions not that much these days, especially with inflation. Sure, I'll take

the over. I was. I thought you'd go lower on it, you guys, I will I will take I guess where here this is happening first and live? This is it? This is so. We've got two reporters slash outitors in the room. They're gonna be writing this up. I'm sure for the for the record, Katie, I'll just buy you lunch regardless. But yeah, seven billion dollars twelve months after

they launched the first projects not project. They're gonna watch at some point in the first quarter UM when the first Capital Group et F hits, we start the clock twelve months later, do they have seven billion total or not? I say under, I'll go with over There we go all right, there we go. That's a good vet. Katie. Let me ask you who would you take if you were like betting on the bet? Who would you go with? I don't know. Eric. I feel like you win these

bets a lot. So just based on historical performance, I have to go past performance is not indicative of future results. Actually listen to those disclaimers. We we obviously build a research product related to it. Okay, Todd the full disclaimer. Have you actually ever won? Have I ever? One? Yes? Not on not on lunch. Uh. Todd is very good on bets that we don't make it steak much or steak dinner, those sort of little ones that we just

do a friendly bet. He cleans up. So it's it's more even you think it's just when we make it steak dinner that he just doesn't work out. Yeah, I think so, I think so. Yeah. Okay, So we talked. We talked about the shiny stuff. Uh, Katie, I'm interested in you know. The other obsession of Eric's is the cheap set, which he touched on. There is there any any other new action in the cheap space that's that's caught your attention? Well, it feels like the lurch towards

lower fees just continue. And it is interesting in talking about you know, these active funds, I mean, even those funds are so dirt cheap, but um, in this sort of race to the bottom, uh, if you look at the leaderboard, I mean, Todd already brought up the fact that, you know, the three big ones have already brought in like a hundred billion dollars this year, and all of this talk of shiny stuff which can be more expensive.

I don't know, it stood out to me that this year everything just seems to have gone to like plain, boring vanilla funds which are dirt cheap, even though I mean I've spent the better part of this past year talking about all the shiny stuff all the means meme stocks and crypto and everything else. But still it just feels like these like such cheap, boring products have this gravitational pull towards them. I think this also speaks to

just the media apparatus. And I'm guilty as anybody. We tend to cover the stuff that moves and does, you know, move around up and down way more if you if you do an NT search on like v T I versus say ARC ARC will have like thirty times the coverage of v t I, even though v t I is thirty times bigger. And that's just the way it is. Um, that's just how it's not just financial, just the way

the media operates. Um. You wouldn't have a media infrastructure if you said to everybody, well, let's just cover vt I all day long. Yeah, because I mean, what is there to say? You know what we did at the top. Okay, So let's talk about this idea of this new Active though, because we kind of got there with the Capital Group and that's another theme in the outlook Eric, So so what what does that mean to you? New Active is And here's where Todd and I will disagree, which is

good for the podcast. New Active We consider if you take smart Beta, so it tracts an index, but let's say it tilt towards dividends or momentum stocks, we would consider that active, even though it's rules based, it's just rules based active. So if you look at New Active, a lot of active, a lot of way people like to consume active these days is through an index fund. So smart Beta e s G. The themes and so

that would be new Active. And if you add up new active plus traditional active, you get a nice solid like of flow lane, which again is in two billion dollars. Considering how much ETFs are taking in and that that lane, that that is where all of the innovation is happening right now. Um, even though as Katie said, six billion are going to the boring vanilla stuff, nobody talks about. That lane of two three in a billion is pretty good. You can definitely carve out a living there if you

have the right product. So since I got set up for it, I'll let me just state my case for it. We would consider the Eye Shares value factor e t F v l u E, which is extremely popular to be an index based product. Now it's being used actively by the investor to tactically rotate in or out based on moving into value and moving away from momentum or quality.

But those have been extremely popular this year. We've seen advisors increasingly used factor et f s from Eye Shares, from invest Go among other single factor products and build a portfolio around those products. But those are index based products. Those are passive. They just are being handled by the investor in an active manner. In my view, No, no, but okay, But you could argue v O O is us being used act or spies being used actively, and

that's passive. I get that our ument. What I'm saying is the e t F itself is active because it has these rules that say if the if the metrics say this, we're gonna buy these stocks. If it doesn't, we're gonna sell these That's the same thing a discretionary active manager would do. They might, they might, They'll have a system with their you know, rankings of stocks and whatnot. This is just formalizing it into an index. I think.

I don't say. I just think the line between a person picking stocks because of how they feel and this is under the same tent of active. All right, I'll agree to disagree on it, but yes, the difference between a factor tilt to it that rebalances every six months.

We know it's going to happen. We don't know exactly what's going in to it, but we know it's going to happen, whereas we don't know what's going into ARCS products tomorrow or what will go into the capital group of the fidelity of the tier price actively managed ones. Those managers have a discretion. But I agree with you the the outside of the pure beta products, the core is go going to grow factors, thematic oriented ETFs which we touched on, and those where that manager has discretion.

We're going to see more more of those products in two and we're going to see them go on or even more of the assets than we saw. I agree with you on that, alright, we're in agreement. Um, it was a huge year for active in that you saw a lot of flows, you saw a lot of active launches. Even though I mean you would have done totally fine in the SMP five hundred, it wasn't a great environment for active managers because I mean, just being again in a boring old index, you would have gotten what twenty

five percent gain, give or take. And I guess my question, uh, what do you make of that? I think there's a few things that are happening. One is the success of ARC in its performance and gathering assets in opened the door for more investors to be comfortable with actively managed gtfs and asset managers to try to launch a me

kind of product to offer those strategies. Some of the actively managed products are semi transparent or I think would you guys refer to as non transparent or active non transparent ets where the asset managers are getting into it. And then we also have these defined outcome oriented ETFs that continue to gain traction, and those I think Bloomberg also the way that we had cf A, we call it those actively managed ETFs. So I don't think when the year ends, we're going to see that these actively

managed gts performed all that well. But investors are willing to to look for something better than just the benchmark. But yes, they would have been quite fine just owning I vv r v O for three basis points and been up more than for the year. Again, the cheap and shiny h if you look in the cheap bucket, there are there's active there. D f A is cheap adventists, which again I consider active is cheap, and they see flows. So the cheaper shiny to me has replaced the active

or passive. As long as you're one of those two things, I think you can see flows. I think if you're passive, like there's index funds that track the SMP that charge forty basis points, nobody buys them. But if there's index like active funds that charge forty basis points, nobody's buying those either. But on the shiny object bucket, there's actually active funds in there too, Like block is active, ARC is obviously active. So to me, um, I think that

that's replaced active or passive. If you can get very cheap, we're very shiny. Investors will overlook, I think sometimes whether your active passive. But I just don't think they want to pay fifty six bits for kind of active. All right, last theme, we're going to talk about outlook digital assets. Eric,

you talked about how big this tent can get. It's long mint equities and bonds and commodities, but you think that there's a new horizon in the form of crypto and crypto futures, and that's obviously what happened this year with the first bitcoin futures product. But where else could that go? Oh my god, the potential is enormous. Um we predict again a trillion dollars probably in let's say ten years or even less. After the first spot bitcoin ETF is approved. Money is going to fly in quickly.

But right now there's only a futures et F. I don't think Genzer will approve a spot for at least a year. So unfortunately we're have to weight to see this play out in full. But right now the rest of the world is launching spot ETF. They're doing well. The Bitcoin Futures et F has got a billion and a half. But until a Genser approved SPOT and then we start to see a few war breakout a crypto basket ETF that is going to really trigger some real money. And so we think that digital assets is sort of

the next big phase in ETFs. Eric, are you referring to digital assets like not including the equity oriented ones that are digital assets related like Vanak has one including Are you including all those themes? Are you including what might be a bit wise related product? Hied to n f t S and know they launched an index. Sure if that's could somehow be e t F, I for sure, But I think I'm mostly just speaking about direct spot crypto investment. You think we're gonna see one before the

ten years is over, I mean, I would hope. So I'm not that barrished. I mean Gainsler. Well, first of all, Gainsler should be gone in two or three years at the very least. I mean, because even Biden is not gonna I mean Biden is probably gonna be gone. So even if a Democrat takes over, they might replace him. But anyway, it doesn't matter. Will I think his mind will evolve over the next couple of years. Um, But yeah, I could be wrong. It could never happen. It's possible.

But even if it doesn't happen, the rest of the world will offer stuff. Canada's got a bunch of going on, but let's just assume that at some point they approve one. I'm saying that's going to trigger a whole new massive asset class for e t F s to cover. Katie. How busy is that gonna make you? You're already pretty busy. I mean from a job security standpoint, that's awesome. I

I don't know. I want to dig into the it's going to take several years to get a spot bitcoin e t F. I feel like the winds shifted so quickly when it came to the futures product. Like in May, there was no hope at all. The tunnel was completely dark, we weren't going to get anything, and then all of

a sudden in August. Uh, it felt like Gensler almost came out of nowhere and said, actually file it under this rule, make sure it's futures back blah blah blah, and then you know a few months later we had one. He's been quite clear, Gensler that he's not comfortable with a spot oriented product and he's concerned about fraud. And I, again, I don't know how you disprove that fraud is going to happen. And I think that's the challenge that that

asset managers are going to struggle with. You know, Gray Scale has, you know, has probably the highest profile offering on on the docket. I don't think that that's going to make its way through. I don't know when it's going to be, but I definitely don't think it's gonna be or I don't believe it's gonna be two, but I'm not I'm not willing to put another bet in the line in two just because I got I I lost. This was the opportunity for you to crow, Eric, I

lost a bitcoin. When would a bitcoin futures based product come to market? And I still owe you for that one, but I'll pay up. Yeah, And to Katie's point, I won't crow too much. Although three um, this was something that did develop quickly and you're right. Once we're always looking at Gainsler's words. If it changes a little, it's possible. Maybe Again, I think of that Obama on gay marriage. He said, I'm evolving, Remember that famous phrase he had.

This to me is Ginzler? How fast is he evolving? And that's all that matters is Gensler's evolution on the crypto market and where that's at. I don't know, but it could come once he gets a little more evolved, it could come more quickly. To Katie's point, I will say I cover macro markets, I also cover E t F. So it feels like gensler watch has become almost to the same level of like fed Watch, like parsing his words, like putting them under the microscope, the same way you

would with Jerome Pale. It's pretty crazy. Okay, So there's crypto digital assets space, the likelihood that et F becomes a rapper that can do things other than just uh equities and bonds and commodities. I'm curious, though, what what other risks could be associated with this space? Right? I think the big risk is just this is such an unusual asset class, and you know, we don't you know, it is a little wild West that which is what

Ganser calls it. There are some unknowns. It's volatile, but again I think people who would own crypto would use it as an accessory on the portfolio and understand actually they want the volatility or understand it. But so I don't see too much. But I just think crypto in general is a pretty developing place, and I think that that would be the risk is what could something happen

that we just don't see. I'm really interested to see what happens with UM, the futures et f s for Bitcoin that are on the market, because remember when they launched, we spend a lot of time talking about, you know, the fact that bit o pretty pretty quickly bumped up against its futures position limits. UM. Obviously the sort of just mad dash of assets into that fund has cooled down, but I mean that's something that I'll be watching. And

then I mean the fact that their future space. I mean we've covered the roll costs to death, but also to get the level of exposure and the fund and I hope I don't butcher the mechanics of this, but just owning the amount of futures contracts that you need to get that exposure. I mean, even though it's not leveraged, it kind of is leveraged in some sense. So I mean, if there's a huge down swing in bitcoin, I mean, sentiment for the past few weeks has been pretty terrible.

Just curious to see what they look on a big down swing, because we've seen them in a huge up swing so far. Yeah, I think bitcoin futures based products are going to be its own investment class kind of investment style, but I think it's gonna be relatively niche. And you know, there's just let's put it in perspective, there's just one point four billion dollars in assets, and as you mentioned, a lot of attention for it this year.

It was perhaps the story of the year. But just one point four billion dollars is not that big a deal in terms of what we got so far of what eight you know, almost nine billion dollars. Okay, as we wrap up here, Eric, is there any other themes or two outlook ideas that we haven't hit on that you wanted to make sure that we touch. Yeah. I think the big one is inflation. This is not going away. This this word is here to stay for a long time.

I think and it's gonna be interesting to see. The et F industry is so a on it about exploiting the news flow. And so we've seen that every and kadie cover this. Every e t F with the word inflation is seen flows this year. I don't think I've ever seen that. Usually there's one or two without flows or nothing. So how many e t s are going to try to figure out how you can actually get

ahead of inflation beat inflation? Uh, we might see a leveraged inflation benefactors ETFs Like there could be some crazy stuff that's gonna be a whole wing of the E t F world. I think, uh, in a similar way that currency hedging was back in the day. Even beyond tips, they'll they'll work inflation into commodities, into equities. There could be some that go across a bunch of different areas. That's gonna be interesting to me to watch UM and I foresee that as being like a sort of mini

subplot next year. Well, Horizon Kinetics Inflation Beneficiary e t F I NFL, which as we're recording this is about nine million in assets. It launched earlier this year, was among the best timed e t s you know, we've we've talked about hack and how they were early just ahead of the cybersecurity, the fact that inflation is so prominent. This is an equity e t F that owns energy materials, companies, exchanges that are benefiting because they're asset light or because

they benefit from it. The fact that we only have one of these products really in the marketplace, or one or two of these products. I agree with you. The asset management industry knows how to launch products that benefit from the same themes that somebody had success with in a prior year. We're going to see more of these products. I feel like the fact that we already have a meme E t F is pretty good proof that um

issuers are just really good at launching funds. Yeah. I was talking to Dave Natick who was saying, how you know, the the year started with meme stocks and then it sort of went here and there, and because it can, ended with a meme t F actually six months, I would say, I'm surprised it didn't come out even faster. Remember there was like a five month period where people are like, why isn't there a me met F? And then I think Roundhill finally filed. But yeah, Roundhill, by

the way put the metaverse et f out. That was another cybersecurity per perfect timing. I think we will continue to see e t s to come out that you're like, what in the hell does this even mean? We have to google the topic because people realize that you sort of have to be before that news moment, that catalyst, that Zuck moment where oh now we care about this. You can't if you do it after, you miss a

good amount of flow action. So again, I think we'll see so much experimentation, and because there's such a hunger for things that are hot saucy, and between that and they getting ahead of stuff, there's gonna be e t s again where you won't even know what it is. You have to google the term hot saucy, and that's what you should name this episode, guys, hot saucy, and

Eric just invented another word. All right. On that note, Todd Katie thinks so much for joining us, and thank you, thank you, happy here, thanks for listening to trillions until next time. You can find us on the Bloomberg terminal, Bloomberg dot com, Apple podcast, Spotify, and where else you'd like to listen. We'd love to hear from you on Twitter. I'm at Joel lever Show. He's at Eric Faltunus. This episode of Trillions was produced by Magnus Hendrickson. Francesco Leady

is the head of Bloomberg Podcast. Bye, m m m m