The exchanged-traded fund (ETF) industry in the United States currently stands at just over $3 trillion with over $300 billion in net inflows added thus far in 2018. Could it be that an ETF industry that has grown exponentially since the Great Recession be poised for growth equal to 10 times its current value in 10 years’ time globally?
ETF Trends Publisher Tom Lydon sat down with Paul Quinsee and Bryon Lake, of J.P. Morgan Asset Management, to discuss whether this $30 trillion valuation was in the realm of possibilities, as well as the recent trends within the industry.
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Opportunities in 2019
At the moment, with a confluence of events like rising interest rates, trade wars and slowing global growth, the possibility of growth for ETFs or any asset vehicle might seem overly optimistic. However, there are still opportunities that can be had in 2019.
“The best opportunities are staying with stocks,” said Quinsee. “We think 2019 will be a better year than 2018. We don’t think the economic cycle is ending just yet. The really bad corrections come when we have a recession.”
Recession is the very word that sends capital markets quivering and with technical indicators like the “death cross” and inverted yield curves in the bond markets being used loosely, it has investors more apt to stay on the sidelines. However, Quinsee isn’t quick to blow the trumpet signaling a recession.
“It still doesn’t feel to us like we’re on the edge of a recession,” said Quinsee. “This growth could carry on for another two or three years.”
Opportunities Beyond the U.S.
Whether it’s investor shrewdness or overexuberant hope, capital allocators into the international space like emerging markets still won’t budge. The markets continue to witness flows into the EM space as investors are beginning to see opportunities abroad as volatility reigns in the U.S. capital markets.
The U.S. stock market has been the default play for investors during the historic, decade-long bull run, but the latest volatility may have steered them off course and opportunities abroad could be an alternative. Despite the deep declines in emerging markets this year, with respect to value compared to price, many of these ETFs from abroad present a profitable opportunity that can be realized, especially if China and the U.S. ameliorate their trade differences.
“As we look at global markets, one of the things that are most distinctive is the ever-widening gap in valuations between the stocks the market loves and the stocks the market doesn’t,” said Quinsee.
“That can’t go on for much longer,” added Quinsee.
ETF Expansion in Europe
The rise of ETFs has not been relegated to just the United States, but use of the investment vehicle in Europe is also blossoming. According to an article in Institutions & Pensions Europe, institutional investors are increasingly turning to ETFs as interest in smart beta and multi-asset funds rises.
“Globally we’re at $5 trillion in ETF assets,” said Lake.
What has led to the growth of ETFs in Europe is not just the inflow of capital into this investment vehicle, but also the mindset behind the movement.
“It goes back to the benefit-rich ETF vehicle,” said Lake. “We think about the ETF as a technology, it’s not an investment strategy. It’s just a technology or a wrapper that allows you to access the markets.”
Just like the way investors in the US can corner specific areas of the market in Europe, European investors can get exposure to the US via ETFs with all the normal benefits that go with the investment vehicle, such as diversification and tax treatment. With the increased usage of ETFs, the path for innovation has also opened up, allowing JP Morgan to offer ETFs to European investors with an active management component.
“We see this as big innovation in the industry,” said Lake. “We’re taking this vehicle that’s relatively new in the grand scheme of things and combining it with a significant active capability.”
Bullish Growth in 10 Years
Lake sees only more growth for ETFs on the horizon. The reasons spurring the growth include the notion that the ETF is viewed as a technology will help further fuel growth in sectors that will continue to see innovation, such as fixed income.
Second, Lake sees active delivery through the ETF wrapper as being a major market mover in offering ETF products that discern themselves from the masses. The active management of ETFs, according to Lake, will be a major driver in contributing to the growth of the industry.
“The ETF industry could be $30 trillion by the year 2030,” said Lake. “I say that because all we would have o do is maintain the same growth trajectory that we’ve had leading up to this point.”
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