Despite the recent volatility in global markets, institutional investors are dramatically stepping up their use of exchange-traded funds (ETFs) because of their low transaction costs, scalability and the transparency offered into their underlying assets. Among the biggest growth areas are managers converting mutual funds to ETFs, thematic ETFs, digital assets and ETFs that focus on environment, social and governance (ESG), according to Brown Brothers Harriman’s (BBH) 2022 Global ETF Investor Survey.

Speaking at the recent IMpower FundForum event, in Monaco, Antonette Kleiser, Head of European ETF Product Strategy at BBH shared key findings of the survey of 386 institutional investors, asset managers, and financial advisors. The ninth annual survey focusing on ETFs shows how investors are selecting and utilizing ETFs, which reached a record $10.27 trillion under management in 2021, an increase of 28%, thanks to $1.29 trillion in new inflows.

“The growth was phenomenal,” Kleiser said, noting that 80% of European institutional investors said they plan to increase their use of ETF allocations, up from 62% the previous year.  

“Even in the first quarter of 2022, with post-pandemic concerns and the Russia-Ukraine conflict, we are still seeing large net inflows into our clients’ UCITS ETFs, which is not consistently the case with our non-ETF clients. We are also seeing new entrants from the U.S. and Asia, who desire to be part of this growth story, launch UCITS ETF funds for the first time,” she said.

Another important trend is the growing number of clients converting mutual funds into ETFs. The benefits of this include allowing the fund manager to use its fund’s track record in marketing materials and allowing the fund to start with substantial scale from the first day of operation.  

The survey also highlighted a demand for thematic ETFs, which hold stocks focusing on one theme such as artificial intelligence. Kleiser said that the BBH Global Survey showed that 80% of European investors plan to increase their exposure to thematic ETFs, which began in the U.S. but are gaining popularity globally.

“Thematics have grown in attractiveness,” she said. “They’re easy to understand and they allow investors to identify long-term trends they want to align themselves with.” The most interest has been for ETFs that focus on the internet and technology, ESG, and digital strategies.

In fact, digital asset and cryptocurrency-themed ETFs are among the most sought after by investors. The BBH survey showed 54% of investors plan to add digital assets and crypto-themed strategies to their portfolios. That’s a dramatic increase from 2020 when digital assets weren’t even mentioned in the BBH survey of investors.

One stumbling block to greater adoption of digital assets or cryptocurrency in ETFs is the unclear picture concerning regulation. In Europe, UCITS funds are prohibited from holding crypto assets. In the U.S., the Securities and Exchange Commission has approved only an ETF featuring bitcoin futures but has not thus far approved ETFs that hold the actual crypto assets directly. The recent plunge in crypto prices¹ has prompted regulators to take a more detailed look at these assets before agreeing to allow new funds.

A Day in the Sun for ESG ETFs

ESG-based ETFs are enjoying phenomenal growth on both sides of the Atlantic, Kleiser said, but some 90% of European respondents to the BBH survey said they plan to increase their exposure to ESG ETFs this year.

In Europe where Investors, who are mostly Institutional, are looking at the future sustainability and resilience of their portfolio composition, the integration of ESG criteria helps them to better manage the material risks. One of the main issues, at the moment, is ESG Standardization. Currently there are challenges of rule fragmentation between markets – which the industry globally is working on.

“ESG by its nature lends itself well to an ETF wrapper,” she said. “Benchmark composition is more transparent and lends itself more easily to ESG classification.” She noted to the audience that Adrian Whelan, Global Head of Regulatory Intelligence at Brown Brothers Harriman, had recently written an article entitled “ESG is Everywhere, But What Next?” that looks at 10 themes in ESG investing that will become important in 2022.

Another ETF development in the U.S. that is attracting investments is the use of so-called semi and non-transparent actively managed funds. These funds have been allowed to skip the normal requirement to divulge their holdings each day, in order to protect their investment strategies.

“Evidence continues to show that ETFs are becoming more and more established with investors,” she said. “They are very successful at gathering assets. Their cost profile for both the investor and the asset manager makes them attractive. Therefore, this wrapper really has to be considered when delivering strategies to investors.”  

Read the 2022 Global ETF Investor Survey.