Dream team of Detlef Glow of LSEG Lipper and Athanasios Psarofagis of Bloomberg Intelligence joined with me, Beverly Chandler, to discuss ETFs in 2023, the outlook for 2024 and the hot news from the US on spot bitcoin ETFs.
This episode of Off the Record is sponsored by Truss Edge, providers of front, middle and back-office software and services to ETF issuers.
Dream team of Detlef Glow of LSEG Lipper and Athanasios Psarofagis of Bloomberg Intelligence joined with me, Beverly Chandler, to discuss ETFs in 2023, the outlook for 2024 and the hot news from the US on spot bitcoin ETFs.
This episode of Off the Record is sponsored by Truss Edge, providers of front, middle and back-office software and services to ETF issuers.
Beverly Chandler
Hello, my name is Beverly Chandler and I welcome you to this outing of Off the Record, the podcast about all things ETF brought to you by ETF Express in partnership with Truss Edge; providers of front, middle and back office software and services to ETF issuers. All views expressed in this podcast are the speakers’ own, and we hope suitably controversial. In this outing for the ETF Express podcast Off the Record I bring you a dream team including me, modestly, whose combined years of experience of observing, commenting and analysing the asset management industry are probably longer than the ETF industry itself. I'm here with Detlef Glow head of Lipper EMEA Research at Refinitiv and LSEG Business, he joined the firm in 2005. And also with Athanasios Psarofagis who is an ETF analyst for Bloomberg Intelligence and covers the industry globally with a particular focus on Europe. As we know, this week's been a huge week for ETFs in the US, with the drama of the launch of spot Bitcoin ETFs in the US. We will be covering that subject but we will open by discussing how the industry did in 2023 and what developments and growth we can expect over 2024 from the perspective of professional observers. So Detlef can I start asking you to give me a brief overview of how the ETF industry did in Europe over 2023?
Detlef Glow
First of all, thank you for having me, Beverly. I think 2023 was a very good year for the European ETF industry. I mean we had inflows of roughly €155.6 billion into mainly equity and bond ETFs and the industry enjoyed a new record or all time high in the assets and the management with 1.6 trillion in AUM over the course or at the end of 2023. So overall that seems to be a very good year for the European ETF industry.
Beverly Chandler
And Athan let's turn to you about the US, how did the industry do in the US over 23?
Athanasios Psarofagis
You know, to echo what Detlef said, it's it was a great year about just shy of 600 billion and which makes it the second best year it's had. But if you look at the last three years, all those are the three record setting years. So it just seems like this is the new normal that, you know everything is transitioning over to ETFs regardless of what the market is doing right? So we've seen all these different market environments: you had COVID, you had 2022 where the market was down, you had last year where the market had a nice run; ETFs just kept taking in, kept taking in money. Even though at the highest level it wasn't a record, there was a couple individual records that were set that I thought were very interesting. One is Spy took in the most money for an ETF ever, just over 50 billion. It was a record amount of launches, which honestly I was a little didn't expect that; expected some closures, but there was a record amount of new products being brought into the market. And then also you had the best performing ETF ever, which was the, it was a crypto stocks one that was up in almost 300% last year, which again was a record for for any type of non-levered ETF performance. So even though it wasn't at the top line of record, there was a lot of very individual strong, you know, things that happened with this. But overall you know, and active had a very good year too just active. I know it sounds a little, you know, the opposite of you don't, you know, relay ETFs to active, but that's changing. And I think last year showed that it's not just the passive story any more, active launches were about 80%. All the new launches were actively managed. So this is definitely a a big change that's happened in the industry last year as well.
Beverly Chandler
Thank you for that. And you can read that interview I did with VanEck’s Matthew about that ETF that it was 291% in the year on Crypto sort of the ecosystem. Yeah, it was a an interesting interview. So you can read that on ETF Express cause it's a very good site as I honestly keep telling people. And let's turn now to this huge development, the launch of spot Bitcoin ETPs in the US this week. Athan, you get to go first with your views. I've been, as you might have noticed, I've been covering this material going through with just the drama; the Terrordome, I love that one from Eric Balchunas; and this business of the fees; and then the hack and the Twitter. So give us the story potted and your views on it.
Athanasios Psarofagis
Yeah, it's been quite a, pretty exciting. So for anyone that doesn't know finally spot Bitcoin ETFs have been approved in the US, looks like 11 being launched at the same time, which is very interesting. I I've never seen 11 identical products all hit the market at the same time. You know usually you know, we even saw it with futures based Bitcoin ETFs, the one that had, the proshares one had a couple day lead, it ended up taking most of the assets. But you know, like you also mentioned at the beginning, I've covered other markets and you just kind of sort of feel bad for Canada and Europe that have had these products, right, and they've had spit spot Bitcoin for a while. I think the next couple weeks will be really telling as to who can, you know, raise the most assets. Is it going to be fee sensitivity, is it going to be brand name because you have some big players that are in the, Black Rock which; it seems like after Black Rock jumped in that's what really sort of changed the odds in it. But you also have someone like Grayscale who's converting a trust into an ETF, so they're already coming over with, you know, 20 plus billion in assets. But you know the the it's starting today, I think I think they're going to get a lot of interest. I don't know if all 11 are going to make it eventually to the end, but I think you you probably similar to what we've seen with gold, you probably have five or six products survive and the rest might have a little bit of difficult time, but nonetheless really exciting. A new asset class being added which is kind of a rare, a rare occurrence, but it's definitely going to be one that's going to be probably a big story even heading into next year for sure.
Beverly Chandler
And Detlef, a comment please from the European perspective. So Europe has the first spot Bitcoin ETF trading since the third quarter of 2023, and we have the ETC group with the largest product with 1.3 billion under management. So yeah, it is kind of old hat for us. But talk to me about how what your thought is of the impact of this US spot Bitcoin product.
Detlef Glow
Well, I think it is in general a non-event for the European ETF industry. I don't think that there's any urgency for ESMA or the European Commission to allow Bitcoins now as a single asset. They didn't done this for gold when there was the gold rush over the financial crisis and the Europe crisis 2008 to 2011, where single asset ETFs gathered billions in assets under management. We are in, we in Europe, we are used to use ETPs and we've got a got selection on ETPs on the crypto universe. So the spot Bitcoin or spot Ether which might be the next to come, is not a big thing for us here in Europe.
Beverly Chandler
And again, we've had success in Europe. We've seen success with products that are investing in the wider crypto ecosystem. Do you want to comment on that as well?
Detlef Glow
Oh you mean the outstanding performance we saw in the last year for those products. If you look on the top performing funds in Europe over the course of 2023, actually the list of the top 15 fund is only, I think, disrupted by three funds which are not related to the crypto universe with the best fund returning in more than 260%, the second one also above 200, the following three are above 100% and then it goes down to more than 60%. So the crypto universe or ecosystem has been quite successful. The question is, will those companies be able to have the same business success over the course of 2024, given that the Bitcoin halving is coming around, which means that the revenues of mining bitcoins will be halved after that.
Beverly Chandler
So that was an interesting point and one that we covered as well about the the rush to lower fees in the US to issue these new products, so Athan maybe you'd like to comment on that. There was a sort of frenzy I think I described it, that your colleague described it as a Terrordome. People went to nought percent fees to encourage investors, doesn't sound like they actually needed to encourage investors, so. But tell me, what's your views on that?
Athanasios Psarofagis
Yeah, I agree. I think, I mean also to be fair, I think when there was other previous launches I don't think we had as much social media engagement as you do with some of these. So the interest is definitely there. I wouldn't be surprised also also in the beginning a lot of it is just a transfer, let's say investors that might be holding physical Bitcoin, putting it in the into the ETF, you know, you see it with Bond ETFs quite a bit. So I I agree, I think the interest wasn't there, but I think it's just more who can get out of the gate very quickly. You know it seems like when iShares had come out with their fee, everything sort of went around what they were doing and now there's the fee waivers. But you know when you look at when you have identical products all being, all tracking the same exact thing, the only thing that's differential is is fees, right? Cause in theory they should all perform the same so what’s the only standout difference? Its going to be who the issuer is and what the what the fee is. So I get it's the only thing they they they could really play with. So yeah, it's kind of interesting to see a fee war break out before the products even launched right. Usually they’ll launch and a competitor might react to it and cut their fees then you cut your fees but this this started, it's already starting very low, so it's only going to go lower.
Beverly Chandler
And also give us plenty to talk about, which makes me happy.
Detlef Glow
Yeah. I mean, if if you, if you look on the the fee war before the product was launched. I mean the the management fee doesn't tell you anything about the total expense ratios. So the management fee is only one component and the question at the end is how efficiently can you manage your your ETF to generate the best outcome for the investor. And I think that will be the differentiator at the end. At the at the first time when the fund was launched you absolutely right, people look on the on the management fee. But over the course of time, you will see who's really able to sustain this fee and to have a very efficient portfolio management process and that will be, from my point of view, the differentiator between the product and the future.
Beverly Chandler
And then I think they might forbid further conversation about this issue because by the time this comes out, this podcast, which I will tell everybody now and put my my stake in the ground, is being recorded on the Thursday after the Wednesday when it was announced so the 11th. And so let's see with by the time this comes out with, if things have changed again, will probably have gone to negative fees by then. But let's look at other things. So we're going to talk now about trends emerging in 2024 in ETFs. Detlef, little peek from Europe. I think it's worth mentioning that the Lipper database covers funds only, so your formal ETFs, just the funds. No notes, no sort of other things, as you would call them perhaps So tell us from your perspective, what do what trends do you see coming in ETFs in Europe over 2024?
Detlef Glow
Well, one trend which is obviously clear to come is the trend toward bond ETF. I mean, it looks like we're at the end of the interest rate hiking cycle. So the next steps to come are declining interest rates and investors expect them as early as in Q1 2024. And I think that the ETF industry in Europe is really preparing for this. We saw a lot of ETF, bond ETF launches already in 2023 and I think there will be more over the course of 2024 and I could imagine that we see higher inflows into bond ETFs than in equity ETFs over the course of the year. The second trend which is already kind of visible is that new market entrants will come over to Europe. The question is, will they buy existing businesses or do they launch their own platform in Europe, we see Pacer ETF now preparing for their launch in Europe and others standing on the sidelines. Last but not least, we may see much more semi-active or active ETFs coming over to Europe, not corresponding to the trend in the US because the trend drivers are totally different. So in the US you use the tax advantage of the ETF over the mutual fund. In Europe, it might be rather the distribution vehicle, so the ETF as a wrapper for distribution via an exchange rather than doing the normal fund distribution with visiting institutional investors and having a platform over there and and these kind of things. So these are for me three of the main drivers for for the growth in the ETF segment for 2024. After such a year, it is hard to predict the level of inflows we will see over 2024. But I would agree with Athanasios’ view that the high inflows into ETFs are the new normal as we have the same flow pattern here in Europe than we have in the US.
Beverly Chandler
And let's turn to you Athan. Tell me what your views are on trends likely in the US industry ETF industry. Apart from the obvious one.
Athanasios Psarofagis
So let's say you know, it's funny that that it started the year off with that decision, but I think there's a couple of other things on the SEC's agenda that could have some pretty big impact on the industry. And the I think the big one is going to be the share class ruling and if anyone who's not familiar with it, Vanguard has a patent where the ETFs are part of their mutual fund share class and other firms like Fidelity, DFA have applied for this patent which is now expired. I think that could be a a big decision if if it's they're approved. You know you do have active traditional active houses already moving into the industry, whether they're launching a clone ETF, converting, or waiting for the share class. I think in terms of a secular change that's going to be a big one for the year that we’re watching, just how are asset managers deciding to go to the ETF. But at the end, all the roads are leading there. I think that's just sort of what the bigger story here is that just you're going to ETFs just a matter of how you're going to get there. And so that's a big one that we're watching. And then on the product trend side, had mentioned 80% of the launches were active. Another interesting thing was about a third of the launches in the US used derivatives in some sort of capacity. A lot of it was sort of for income sculpting or sort of outcome sculpting, but that's another interesting one. Just the products themselves are not that plain vanilla anymore, right? They're active, they're op- they're they're using options, they're one… So I think we'll continue to see sort of a pushing on of the envelope on in terms of product trends, you know, now you have single stock levered ETFs, so I think you'll continue to see issuers try to come up with pretty innovative ways. Whether or not they all survive I think will be, will be told. But I think we're going to probably continue to see some pretty interesting ideas in terms of product launches.
Beverly Chandler
And then let's just talk briefly about the investor base distribution in the industry. Traditionally, obviously in Europe it was greater use was by institutions, fewer retail. Detlef that's changing a little, isn't it?
Detlef Glow
Well, that depends on the markets you are looking at. So in Germany for example, we see a clear trend of retail investors using ETFs through brokers or other trading platforms, which are easy to access and which offer a great variety of different products. In other countries in Europe the they are struggling with that way of distribution. For example, in Spain you've got a disadvantage, tax disadvantage for ETFs compared to mutual funds so there the mutual fund is the investment vehicle of of choice. In the UK, a lot of the retail investor platforms do not have access to exchanges and therefore do not offer ETFs to their investors. There are also some some initiatives underway to change this and I hope that this will will speed up soon. You see in Switzerland there has been formed an excellence hub for saving plans by Fundplat which is heavily supported by the fund industry. So you see that there are tendencies to bring the ETF to the retail investors. And from my point of view at the end of the day, they will be as successful as they are in Germany, where you see a high number already also on a high growth rate, increasing number of private investors having saving plans into ETFs.
Beverly Chandler
And Athan, in the US traditionally it was originally more of a retail product. It was that, originally, almost like that mom-and-pop structure that, that offered ETFs. So quite small firms, that's all changed. Are we seeing more institutional use of ETFs in the US?
Athanasios Psarofagis
Yeah, we are for sure. I think one, again to not keep talking about this, what the bitcoin, spot bitcoin put into the ETF I think is going to open up a lot of institutional usage there. But then the other thing is obviously just flows and stuff going up. Trading has shot up quite a bit this year. So you're seeing, you know, just the ETFs. You know, a lot of it just tends to be, you know, the same name, Spy or whatnot. But you you were seeing an uptick in trading too and some of these numbers I think is just pretty conducive to more institutional usage. You know, so again, just all roads keep pointing over to to ETFs. But I think it's always sort of been advisors that have that have used ETFs the most on behalf of their clients but I think some, some of the new launches, or even a lot of hedge fund type stuff so, you know, simplify sort of launch hedge fund type ETFs that I think could also. And they've lined up some institutional investors so we're definitely seeing some uptick in in that investor base.
Beverly Chandler
And that's a really interesting phenomenon. I'm just gonna mention that we did a podcast on ETFs as a share class, for anyone listening to this, if you want to look into our Off the Record archive, you'll find that. We've got a good panel on there explaining what they are and how they work. I'm going to thank you both for your time today, so thank you to Detlef Glow of LSEG Lipper and Athanasios Psarafagis of Bloomberg for their time today. And I want to thank you also for listening. This has been an Off the Record podcast from ETF Express brought to you in partnership with Truss Edge.
Outro
Off the Record is brought to you by ETF Express in partnership with Truss Edge providers of front, middle and back office software and services to ETF issuers. Production by Imogen Rostron and Lisa Hines and music by Otto Balfour. Thank you to our guests on this episode of Off the Record from ETF Express and to you for listening. We look forward to you joining us next time.