Welcome to Trillions.
I'm Joel Webber and I'm Eric Belchernas.
Eric, there's a new survey that you were really excited to bring into this week's episode. What's it about.
Yeah, it's a BBH survey of a variety of investors. I love ETF surveys, Joel, I really do, because I get all the flow data and volume data and priced data and holdings dad. You know, the terminal is full of all kinds of data. It's like a giant candy store. But we don't have survey data, not like this, and I love looking through it because it helps you sort of align the hard data with the anecdotal data. This is why I go to conferences and hang in the hallways.
I want to hear from people. What are you thinking and doing to me? That's half of our job. So this survey, especially this one, I look through it and I got two notes out of it and some interesting data points here, some stuff I expect, some stuff I didn't, but I thought be cool to ask about some of the particulars in this really really thorough survey about how people feel about ETFs, what they're planning, different categories. There's a lot to chew on here.
So to help us chew on that and these responses, we're going to be joined by Sean McNinch. He's the global head of ETFs at Brown Brothers Harriman. This survey is called Exchange Thoughts. It's the tenth annual global ETF Investor survey, this time on trillions. Survey says Sean, Welcome to jrillians, thanks for having me. Okay, so ten annual surveys, A little bit's changed in that time. What's the big high level takeaway from what's changed over that decade of the survey.
I think it's just the evolution of the ETF market overall. You know, if you think about ETFs, you know they are really now or at the center of a lot of the investors allocation strategy. You know, more and more usage of ETFs, more asset classes, more structures. You know, if you look at some of the results of survey, you know, sixty percent of the investors we pulled are
planning to increase their usage of ETFs. And it's no longer just a passive product, right, It's it's really moving into active, moving into new asset classes such as fixed income, and so there's there's just more and more usage of ETFs in the marketplace than, you know, than than there was ever before. You know, since we started this survey ten years.
Ago and there's three hundred and twenty five global respondents to this. They're managing more than forty percent or managing more than a billion in assets. So this is also kind of an institutional crowd, right, and you've broken them down by the US, Europe, and then Greater China. When you when you kind of think about that that global distribution, what were the takeaways for the US audience that that you thought we're particularly interesting?
Yeah, No, I think it's you know, the asset classes that they're using and the more and more demand. You know, if you look at some of those surveys results for the US investors in about forty six percent of those investors are planning to increase their usage of fixed income ets, right, And that's relatively a newer asset class than the ETF wrapper.
There's there's less products out there.
More and more of the new products that are coming out have a fixed income bent to them, and that's obviously of interest to investors as they are looking at rising interest rates and how do we kind of diversify the risk from equity to fixed income and other asset classes.
Yeah, that fixed income bit came out in the surveys. The ESG responses pop to me, which I know Eric's gonna want to say something about what. What did you write your Bloomberg Intelligence notes about Eric?
Yeah, the first note I wrote was the early in this survey guide. I guess you call it twenty five pages. Here's the question, what is the most important factor when selecting an ETF? This all the surveys have this. I love seeing where this ends. Number one expense ratio, number two etf issuer. Now last year issue was one expense
ratio two. What does that tell you? Those two things are joined at the hip, and when we think about flows every year, you know it's now become the big two Vanguard Blackrock, Yet there's definitely a plenty of money for everybody else. It's a big tent that said, you
have to just acknowledge how big they're. So my note was sort of equating Blackrock and Vanguard ETFs to ibm'stock in the eighties where an advisor would be like, you can't get fired for buying IBM, Like, who could really, you know, diss you for that or get upset if you're a client. It'd be hard to really get mad at an advisor or fire them if they put you in black Rock or Vanguard ETFs. It's a career risk
motivated move as long as a low cost move. And so because some people say, well why do they they get all the assets and the flows when everybody has cheap ETFs, I'm like, well, the brand matters too, and so I guess Sean, you know that those response responses kind of I think tune in or connect with the flows or did you see something different there?
No, I think that that's obviously right.
And obviously the big three with with Vanguard, black Rock and SSGA, you know, having the line share the market share. You know, that's definitely the case. As people are looking to buy passive products and as you're looking at you know, where flows are going and more and more entrance coming in here. That may change as we look to the active ETF space, right and it's still relatively small fertile ground, and you know it's only about five percent of the
total assets are made up of active ETFs. But I completely agree with you on the pass side. More and more investors are really looking at expense ratio in the brand when selecting passive vehicles. But that could change as we get into different types of you know, ETFs.
And the Blackrock and Vanguard ETFs are also becoming some of the most liquid once these puppies are cheap broad liquid like is liquid is like a trading over a billion a day look out. I mean, these things are going to rule the land for twenty thirty years. One other interesting part to this is trading spreads and volume were low. Volume in particular was the third most important reason,
and it dropped to like eight or nine. And is that a sign that investors are getting a little better about looking at the holdings and ETF implied liquidity or is there some other explanation for that? Now?
I think that's that's kind of the evolution of the ETFs and the maturation of the ETF product, right. I think early on, you know, people were really concerned about volume, you know, making sure these products traded well, making sure
there were tight spreads. I almost think especially with the most liquid ets in looking at different ETFs that trade, it's almost a given that there is tight spreads and there's you know, investors can come in and now of these products and you know, in a cost effective way.
So I think that's that's the kind of the evolution of the e TF market, as how investors are looking at different selection criteria that it's almost a given that that there's liquidity in the market, there's volume to support that.
So what do you make of the fact that what Eric is referring to as an answer to this question, the question was what is the most important factor when selecting an ETF? Expense ratio rinks number one in the US, but that is like a distant fifth in Europe, and it's a it's in sixth place in Greater China. Europe puts tax efficiency first, trading spread second. Greater China has
index methodology first, trading volume second. I'm sort of surprised that regionally there seems to be a difference in what you're looking for in ETFs. But what about what about Europe for instance?
Yeah, I think because you know, the US market is the most liquid when you're comparing the different regions and the ETF market, that investors have gotten by that in the US market and that they see that there is liquidity in that market. I think as you move over to Europe and into Asia, there's still questions about liquidity and making sure that there is enough volume on the local exchanges to support those ETFs.
You know, it's like almost like there's still a couple of years back from where completely.
But you also have the fragmentation of the market over in Europe too, you know, so if you think about there's fragmentation of across the different exchanges across the you know, twenty eight different exchanges in the European marketplace, so you know, whereas in the US you have centralized liquidity on a few exchanges, so you're fracturing that as you're going into Europe.
So investors are more keen on looking at trading volumes, looking at spreads as they're making making investment decisions.
By the way, what is greater China in the survey's.
Twan, Hong Kong and mainland China.
That fragmentation is a huge issue. Every time I go to Europe, they always talk about the consolidated tape. They want to put it all on one so that the volume looks more realistic. But it's very difficult when you have all these different countries. It's harder as a data person as a research channalyst, I feel for Rebecca and Henry who cover those areas for US US is so we're spoiled. It's just one country, one currency, and is really good.
And Eric, I would also add that over in Europe it's a huge OTC market too, right, So yeah, a lot of the trading volume is done off exchange, right, so you don't have that liquidity of those prints on exchange as you would do here in the US market as well.
Uh, for sure, that's one of the headwinds over there. I also I want to actually add another thesis or theory to your questions role, which is that I feel like if you look at where fees and the flows travel south the quickest, it's in countries where the government has pushed the people to like plan their own retirement, so they got to be like a a little more like heads up, whereas in other in many other countries, a lot of people just like the government's got me.
I don't really need to care that much, but once this is your money. I think, uh, defined contribution plans in particular pushed Americans to become a little more savvy, and also the move to the fiduciary advisor. Once the advisor gets a percent of the assets instead of paid off by the mutual fund company, they're going to put the expens ory issue much higher because now it's coming out of their pot too. Would you agree with that, Sean most definitely.
You know, the financial advisory market here in the US is so much more evolved than in the versus in the European market and Asian market as well, So that's definitely an area of potential growth in those markets.
As the financial.
Advisory committee or community starts to grow in those geographies, that that could be a good you know, Taal went for the ETF market.
So the other note I wrote about this servidual was that BBH is predicting that global ETFs we'll hit thirty trillion dollars.
I was gonna ask about this.
Yeah, I mean right now they're at nine. Okay, that's a lot of trillions, and we should name the podcast after this says something like.
That hindsight, the trillions thing looks really good.
I know that was your idea.
Okay, So thirty trillion is a lot of trillions. Is bluebrig intelligence north of that or south of that?
So the note said that bbh's thirty trillion dollar call will in parentheses eventually come true. I just don't know if ten years might take longer. Here's why, Sean. The main reason is market appreciation. We just came from a decade where this stock market went up like twenty percent a year and it was just so so much above average. This reversion to the mean of historical returns could mean a lot of years where it's not up or down. And if you don't have that market appreciation, I don't
think flows get you there. The other thing is what I said earlier, where I think some of these countries and their mindset and plumbing is so ingrained and it might even take twenty thirty years for some of that plumbing to loosen up so that the all the ETFs are on a level playing field with other types of structures.
Yeah.
So if you look at the thirty trillion number, they would have to grow at about a fourteen percent annual rate. And I think what we factored in in there is this conversion from mutual funds into ets and that could help springboard some of that growth rate. And if you just look at netflows, you know, like looking at last year's netflows ets were up about eight hundred and sixty billion. Mutua funds had net outflows about eight hundred and twenty
billion of assets as well. So we're really looking at this more shift from mutual funds into ETFs, right, and whether that's through mutual fund to ETF conversions or more and more investors selling mutual funds to buy ets, which we've seen as a trend in our surveys results as well.
So conversions have come up a couple times already. Let's just talk about what the survey indicated on that we've talked about conversions a lot. This is mutual fund conversions to ETFs. What did the survey reveal.
We didn't have any particular questions on the mutual funded ETF conversions, but what we did see, you know, looking at just the number of conversions that have happened and just the number that are in the pipeline, they're going to be major mutu fund managers doing conversions into muture funds into ETFs. And if you also just look at the number of active ETFs come in to market last year, that represented you know, about a thirty percent increase in
a number of active ETFs. So these traditional muta fund managers that said, hey, we're never going to launch an ETF are now launching ets because they know they need to have that product in their in their product lineup. So I think that's where we're seeing potential opportunities, not only obviously market appreciation, but also that just that pure number of new entrants coming in this space and basically taking away from the mutual land market.
Yeah.
And I will say I actually used that in my I was just on a Canada tour and one of the points I made was that BBH has thirty trillion. JP Morgan preicted the US market to hit fifteen trillion in the next five years, and Bank of America two years ago predicted fifty trillion global by twenty twenty nine. My point wasn't are they going to all come true? My point was a they're directionally correct. I think we can agree. But here's some real inside Wall Street firms
now making these predictions and putting out product. Morgan Stanley jumped in, this is big boy money, right. So to Sean's point, if you get a lot of those clientele, a lot of those fas, plus the blob of money that's in mutual funds. Let's say half of it comes over, you could get close even without a lot of market appreciation. But again, last year was in twenty twenty one, the flows were nine hundred billion and that was a record. Well, in order to get to thirty trillion from you know,
you would need more than that every year. So that's the only reason I'm most slightly cautious. But I'm certainly with you in spirit, and I think you'll eventually see thirty trillion, no doubt.
So what about commodity ETFs. Because we've talked about fixed income ETFs a con on the program, like and they've become more and more prevalent, but we haven't spent as much, quite as much time talking about commodity ETFs. And I think just with the overall economic environment that we're in right now, there's increasing interest. So what do this survey reveal about commodity ETFs.
Well, if you look at the commodity ETFs last year, I think seven on the top ten perform and ETFs were commodity based, right, And I think that's that's kind of a typical move to when there's volatility in the market, you know, uh, investors moving to different asset classes like commodities.
You know, I think if you look at the investor results, you know, sixty nine percent plan to maintain or increase their allocations to commodity to atfs the next twelve months, with about you know, about half of those, so thirty three percent saying they're going to increase their allocation to
commodity ETFs. So I think that, you know, that kind of bodes well for continuing uh, you know, assets coming into commodity space, and especially with you know, volatility in the marketplace, I think those those commodity ets, we'll gather some assets.
Okay, let's turn to thematic ETFs. Themes were really big back in the low rate era, you know, like themes like ARC and innovation, clean tech and all that. Now everything's flipped. So you do have natural resources doing well because they are full of values thoughts, but it does seem like the thematic play tends to be more with growth.
So I was surprised to this result, which is that you have respondents saying that in three years, what percentage of your portfolio will be in thematic ETFs in the US about forty three percent, say over eleven percent. That seems a little high for me. And then the other one is in China it's over eighty percent. Like they
must they love their themes over there, I guess. But those both those numbers seem a little high relative to flows and anecdotal not saying that's crazy high, But what what's your thought there?
We Well, first of all, all the investors that participate in survey are users of ETFs, right, so if they are not users of ets, we've we're not including them. So right out of the gates, there's there's that population that aren't investing in ets today, you know. So this increase, you know, typically inflates the numbers here a little bit. But I do think thematic ets, especially last year, had
a little bit of a dip in market appreciation. But I think as more and more UH investors are coming into, you know, to this year, they'll be looking for different ways to invest their their assets into into new different asset classes, and I think thematic.
Et s is one area where you.
Know, investors looking to diversify away from market capital type of products they'll be moving into into more thematic ETFs.
Also thought it was interesting what some of the strategies in the thematic ETFs that resonate. Obviously, Internet and technology are a big one, but artificial intelligence came up as one that would be particularly interesting in the US and in Greater China. What did you make of that?
Well, I think that's that's obviously a huge growth area across you know, just not even financial services, but across how different firms are using AI to improve their you know, back office operations. So I think, you know, investors are trying to figure out ways to capitalize on that growth into the AI community and that that that obviously will kind of bode well for those types of products in the future.
And how why do you think the Americans are so much more bullish on cannabis than everybody else? That was another one that jumped out at me.
I think it's just you know, the evolution of the ETF market, right, there's a lot more cannabis type of ETFs here in the US market. And once again, that's another you know, asset class that investors are looking you know, some some investors are looking to get some exposure to whereas over in in you know, Europe, you know, there's a few products there, but I don't believe there's any over in in Asia.
Yet, all right, let's move to ESG, my favorite topic.
What what surprised you here?
It does?
It doesn't surprise me when I see surveys way over optim being way over optimistic on ESG. And I'll tell you why, Sean. It's not your fault. Nobody filling out a survey wants to be judged. That's typically why political polls can be off. You don't really want to share that you're voting for this one person. So in this case, you have forty five percent of US investors say they want to increase their exposure to ESG. That's a lot of money. I know Europe is good, but Europe's almost fake.
They're just relabeled at ESG and the government it pushes everybody there, and it's a it's not natural. US is a natural market, and last year US esgtfs accounted for one percent of flows. This year there's outflows. Why they're underperforming. I think the underperformance because they tend to be overweight tech and growth, which is not is you know now
value and energy had such a good run. I think that underperformance, just like we saw of currency, HGTFS is going to have a lot of once bitten twice shy going on. In other words, even if ESG has another run where tech and growth outperform and they look good, I think the tourists are shaken out for good. I think you might have a small niche of two three percent market share of true believers. I've stood by this call for six seven years, even before it was cool.
Now some more people have been somewhat critical of ESG, but that's my theory. So I'm not surprised these are the results. And I'm not saying this is wrong. I just think people are going to generally say yeah, because they don't want their name attached to somebody who doesn't like ESG, because it's to be like, what you don't like this stuff? Are you a bad person?
Yeah?
There's a lot to react to.
Yeah, No, Eric, I think this is definitely one of probably the surprising results from the survey, you know, because I I don't know if investors are putting, you know, taking action, or putting money where their mouth is as it relates to this response.
You know.
However, to your earlier point, it's definitely a different world over in Europe. If you look at flows into Europe, about sixty five percent of flows last year, we're you know, titled ESG ETFs and they have about nineteen percent of the market share over there. So I think that's that's an area that is you know, obviously embracing ESG type
of products. I think there's definitely been a you know, a pullback in the US market, especially in this this first half of the year, with concerns around greenwashing.
Uh.
You know, index providers reclassifying some of their indices that were previously ESG that are no longer ESG. And then you know some large jitutional investors kind of you know pulling back on their investments into ESG products. So I completely agree with you on that one.
Okay, so time for one of my favorite big takeaways, which was the use of robo advisors has tripled in the last year, that kind of from from ten percent to twenty nine percent. I thought that was phenomenal, Sean, and I wondered why you thought that happened. Obviously this has been around for a second, but like, why all of a sudden has the robo advisors seems to be gaining appeal.
I think it's just you know, with more and more you know, self directed investors you know, managing their money. You know, robo advisors, you know, they're they're a cheap way to kind of, you know, have some professional advice. And I think ets obviously play a role in that with just the underlying assets and the robo advisors, and so I think that's what's really driving that is more of maybe the younger investors that are coming in look looking for advice, embracing more robo advisor platforms.
All right, let's turn to active ETFs. This is section which lines up with the flows perfectly. So the question is do you plan to increase your allocation to active ETFs this year? In the US thirty nine percent say increase, well, Joel, this year, active ETFs have captured about thirty three percent of the flows. That's pretty close. Last year they captured fourteen percent of the flows. That's big numbers for something that only makes up five percent of the assets. So
active ETFs finally having their day. I have a theory on this, Sean. I'd like to get your theory on why active is finally taking off, because remember you've been in this industry for a while. It was supposed to be the year of active, like ten times in a row it. Finally it happened, and I think here's I think two things. One, the regime change fundamentals mattered, and active tends to be more fundamentally weighted and interested in fundamentals,
so they did a little better. Number Two, these big firms like JP Morgan, Evantist DFA came into the industry and came out with low cost back. And if we did a study, we looked at the active share, which is how different it is from the benchmark. The more the less active share it has, the lower the fee is. In other words, these funds are being priced in a beta adjusted way so that you're really only paying for the active, not the beta, which can now be gotten
for free. And I think this was the problem for a lot of the entrance up until now, they were charging you for the beta too, and I think advisors didn't really they weren't responding to that.
What do you think, Yeah, no, I think you're one hundred percent right on. With some of these these large mutual fund managers coming in this space, creating these active ets, it's creating more you demand in the marketplace, and you know they are being priced lower than their mutual fund brethren. You know, so I think that's all, you know, what's driving some of this growth and just a pure number
of launches that we're seeing. Right, So the number of active etss that came out last year increased by thirty percent of just new products coming to market. And so these mutua fund managers they you know, they see the outflows into the muta funds, and they know they need to have an ETF, you know, to be competitive for a certain type of investor type, which is growing.
Okay, let's have a little fun. I know, there's this interesting relationship between advisors and the wholesalers. So you actually had this section here, which I wasn't expecting. It was kind of cool. There's a zoom boom going on, Joel. They don't want to do they don't want to see you anymore if you're a if you're a wholesaler, they want you to just zoom them.
Maybe emailing.
Yeah, it seems like a lot of in person stuff. Maybe it's just because the COVID or because there's so many issuers they get inundated. What's your take on why that has grown so much versus the in person wholesale kind of meeting.
Well, I think you know, we are, we're going to be living in this hybrid world, you know, going forward, right, And I think just like financial advisors, you know, they like to get in and get out of meetings, and this is a very efficient way to do that. I think when you're thinking about from a wholesaler perspective, it can be you know, less time on planes and having
more fruitful meetings with advisors. However, there's a cost to that, So how do you build up those relationships and so you know, I think they're still going to be made for that in person relationship to kind of really move the needle. But I do think this hybrid world that we're in that more and more wholesalers will be connecting with advisors through the use of zoom.
Yeah, but do you get the golf balls? If it's over zoom, you don't get the golf balls, do you?
Well, you still have mail, you can still mail those out.
That's the best of both worlds. Look, you had ten minutes on zoom, just mail me the provy ones.
So Sean lots of surveys. You've done lots of surveys. I've done lots of surveys. Eric Wishes, He's done lots of surveys. The thing with the survey is that you get the results back in your life, like what popped? What surprises me? So I'm curious when you got these results in what was the thing that surprised you most?
You know, I still think one of the things that surprised me is, you know, nearly half of the investors still planned to add cryptocurrency and digital assets into their into their portfolios, right, And I think that is a shocking you know number, you know, just given you know the volatility and that that asset class, right, and.
So wasn't it so that they could short it? Though?
Maybe that's what it is that does seem high.
I was surprised to see that as well. But do you think they wanted to come off of like, oh, if it was you know, something I could more easily short, that would be great.
Yeah, that is that it. I don't know what do you make of that?
Truly? I think part of it was that. But it's also like, look like after something gets this beaten down, this gets to the whole thing that we talk about a lot, where you have a lot of things that are so safe and predictable. It's like, where's the hot sauce and like maybe if somebody got lucky and had some hot sauce shiny object.
Right, yeah, I mean crypto it's just had such a bad year performance wise with SBF, but you know, it went up again. I mean it's like a cockroach. You cannot kill it like.
It's just but you can't easily treat it either.
I know. And it does tend to have you know, the correlation is could be valuable to I get it. I'm just surprised with.
This audience.
Well, right, this isn't like, well, Sean, here here's a theory. Because you're interviewing people who use dtfs, you're probably you're probably actually tilting towards younger people and early adopter types who probably are more interested in crypto than if you interviewed a bunch of I don't know, people who hold mutual funds or something.
I mean that could be too.
But we also have a number of institutional investors that
are looking to increase their exposure to crypto as well. Right, And I do think it is you know, not for the faint of heart, but certain investor types that are looking as a diversification away from you know, a new asset class that they that potentially could create some returns, right, and you know to your earlier point, you know, bitcoin was at fifteen thousand, and you know it's at thirty thousand or so today, So it's some real returns in in in the first half of the year.
So, Sean, we actually touched on two things that my team and I we nerd out on this question. It's like a it's like, this is what ETF NERD comedy is like in our persistent chat. What do you think will happen first the consolidated tape in Europe or a spot bitcoin ETF in the US.
Wow, that's that's a tough question there.
That was Wow.
How isn't this the mescificity of that arsle from the nerd vault.
Yeah, we've had to go to the consolidated tape in Europe.
All right, Good, at least you gave an answer. I think I think a spot ETF. I think if Gendler moves on, I think it opens the door probably a little more.
But you may be right, okay, Sean. Final question one that we often ask on trillions favorite ETF ticker other than anything that Brown Brothers Harriman is affiliated with.
Well, that's a tough, tough question there.
You know, I think tok is kind of an interesting, uh interesting.
Bring the cannabis answer. Yeah, I like that.
Yeah.
By the way, did you you know what the expense ratio in toke is.
I don't know it off hand.
No, it's forty two basis points. But on the Bloomberg DS page it goes to three decimals, so it's four two. Oh, that's meant favor. You got to love that sort of artistry that was embedded into the ECF. I love that.
Not a coincidence, uh, Sean McNinch, thanks so much for joining us on Trillions.
Thanks for having me, Thanks for listening to Trillions until next time. You can find us on the Bloomberg terminal, Bloomberg dot com, Apple Podcasts, Spotify.
And wherever else you like to listen. We'd love to hear from you. We're on Twitter.
I'm at Joel Webber Show, He's at Eric Paulchnis. This episode of Trillions was produced by Magnus