On the back of recovery from the COVID-19 pandemic, the exchange-traded fund (ETF) market reached inflows of US$1 trillion for the first time. The rising interest in ETFs in 2021 was driven by demand for better transparency and higher returns over actively managed mutual funds. Especially with the acceptance of online trading platforms like Robin Hood, investors are taking investment decisions into their own hands rather than the traditional way of investing in a mutual fund.
Review of 2021
The ETF market reached an important milestone as the worldwide inflows hit the US$1 trillion benchmark for the first time in history at the end of November 2021, surpassing the previous year’s total of US$736 billion.
In 2015, PwC published its 2nd Annual Global Exchange Traded Funds survey and predicted global ETF assets to exceed US$7 trillion by 2021; current ETF global assets as at November 2021 are close to US$9.5 trillion.
Moreover, there is a record of 406 new issuances of ETFs as of the end of November 2021. This number of ETF issuances was 27% higher than the previous year’s issuances of 319 ETFs. This brings the current ETFs on offer to 2,688.
One of the key points of the significant positive inflows of ETFs in 2021 is that the historically low interest rates have also forced many investors to rethink the traditional stock–bond allocation strategy and allocate more to equities.
However, the volatile equity markets in 2021 have led to more investors making their way to index products which benefited ETFs. Furthermore, there are a lot of new entrants into investing since the pandemic started in 2020 and people are more cost-conscious. As retail investor try to save on commissions, an ETF is a lot cheaper than a mutual fund.
During the same period, global Islamic ETF funds performed well. The one-year performance of iShares MSCI USA Islamic UCITS ETF, iShares MSCI World Islamic UCITS ETF 2021 and SP Funds S&P 500 Sharia Industry Exclusions ETF in 2021 stood at 30%, 23% and 33% respectively.
Preview of 2022
Globally, governments and central banks are rolling back their pandemic stimuli and are expected to raise interest rates in 2022 to manage the high inflation in 2020 and 2021. The Bank of England is the first major central bank to raise interest rates since COVID-19 hit in 2020 amid fears the Omicron variant could slow the economy.
Despite the possibility of an increase in interest rates, there is still a lot of time needed to control the decade-high inflation on top of the fear of new COVID-19 variants. If the low-interest rate environment persists in 2022, there could still be high inflows into equity ETFs, especially those that have a higher possibility of beating inflation.
One main area that is garnering interest for ETFs is thematic investing, especially based on the UN Sustainable Development Goals (SDGs). ETFs have developed a positive reputation in the context of targeting niche sectors. Now there are ETFs servicing almost every SDG, including products with a focus on clean water, gender, equality and infrastructure.
Moving forward, there will be more innovation in ETF issuance to serve this market as ETF issuers hope to capture a segment of the growing popularity of environmental, social and governance investing, where investors seek to align their personal values with their investment.
Furthermore, another highlight will be more countries issuing their first Islamic ETF. 2021 saw Russia and Canada issue their first Shariah compliant ETFs as these countries see a bigger role for Islamic finance to serve the public.
However, the focus may still be on equities-based ETFs rather than Sukuk due to the low-yield environment and high inflation.
Investor demand for ETFs has seen a tremendous increase over the past years. Diversification remains the major driver behind choosing to invest in ETFs by reducing individual stock exposure risk and lower cost.
However, investors should remain cautious when investing in ETFs. One of the oldest ETFs is the SPDR S&P 500 ETF (SPY) launched in 1993 and since then 3,751 ETFs have been brought to the market. But there are only 2,688 ETFs currently in the market as 28% of the ETFs have since been closed. Although there are plenty of choices for investors to invest in ETFs, time-tested strategies, low fees and high liquidity may be the best especially for beginners.