ETF Ecosystem Unwrapped: Key takeaways from fund selectors

ESG, crypto and emerging markets were key touch points but ETFs are “here to stay” despite imperfections

Jamie Gordon

a group of people sitting in a room

Fund selectors that attended ETF Stream’s flagship ETF Ecosystem Unwrapped 2022 event shared their thoughts on the ETF landscape and some key talking points gleaned from industry thought leaders.

Weixu Yan, head of ETF research at Close Brothers Asset Management, is in no doubt assets in ETFs will continue to grow.

“There is nothing really to stop that from happening. There is so much innovation and focus going on which makes the industry so exciting to follow,” he said.

Echoing his thoughts, Wesley Wilkes, managing partner and investment director at Iron Markets Group, said as a research-focused tactical asset allocator, ETFs play a foundational role in what his firm does.

“My biggest takeaway, purely selfishly, was indirect validation of our investment thesis by some of the heavyweights of the ETF industry,” he said.

However, Mark Northway, investment manager at Sparrows Capital, highlighted some structural issues within ETFs with potential to create lost returns or even existential risk.

“I am concerned about the efficiency of ETFs and index investing given the size of index rebalances, inclusions, exclusions and capacity issues,” he said.

On index reshuffles, he pointed to the recent and controversial exclusion of Tesla from the S&P 500 ESG index, which not only raised eyebrows but also meant a large sum of Tesla assets had to be dumped by ETFs tracking the index and replaced with the securities that took its place.

Northway then referred to the last year’s capacity issues with BlackRock’s clean energy ETFs, with flows in and out of the products ultimately driving the performance of the underlying smallcap companies – before S&P Dow Jones Indices reconstituted the underlying index.

Quintet Private Bank’s head of thematic research Pinaki Das was also cautious of the outlook for emerging markets exposures and believed some downplayed key risks to be mindful of.

“[One speaker] was not concerned about rising costs (energy, food, debt) in emerging markets whereas I feel there might be some worse scenarios among many,” Das argued.

Close Brothers AM’s Yan, meanwhile, sympathised with an argument about emerging markets being “too homogenous and undiversified”, with China remaining a dominant part of the MSCI Emerging Markets index. However, he added most of the MSCI World is made up of US equities and “barely anyone queries that”.

Overall, Yan was encouraged by discussions around innovative ways to use the ETF wrapper with new active, sustainable and even carbon exposures – alongside debates around how to access crypto and greenwashing, data and ratings issues within ESG.

Quintet’s Das said a personal highlight was speaking live with Professor Robert Shiller and hearing his views on digital assets. “He was not negative about crypto which was interesting – from someone who has seen so much in finance over so many decades.”

Confidence that innovation in products, trading and regulatory structures was an underlying theme of most of the discussions while teething issues in the wrapper were brought forward and invited healthy differences in opinion. Das resolved: “It is clear that ETFs are here to stay.”

This article first appeared in ETF Insider, ETF Stream's monthly ETF magazine for professional investors in Europe. To access the full issue, click here

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