The ETF industry proved in 2023 it can still muster scores of market firsts despite years of product innovation while cutting fees and trouncing the flows of other fund structures in the process.
Set against an unpredictable macro backdrop, ETF issuers continued to break new ground in granular fixed income, actives, defined outcome and even thematic ETFs.
Europe-listed ETFs are also on track to book their second-best year of asset gathering on record, with €138.3bn inflows in 2023, as at 8 December, according to data from Refinitiv.
In fact, by the start of December, ETF inflows were outpacing mutual funds by €181bn this year, with investors turning to the wrapper for lower costs and the increasingly targeted exposures entering the market.
As a result, ETF Stream has selected the five best ETF launches over the past 12 months.
1. BlackRock fixed maturity iBonds ETFs
The four ETFs – launched in August and alongside the five additional products added to the range a month later – provide exposure to US dollar and euro-denominated investment grade credit and sovereign bonds with individual maturities spanning 2025-2028.
The products enable investors to target specific maturities with a diversified basket of bonds in a single transaction, meaning they do not have to manually access a handful of the underlying bonds themselves.
This is achieved by each ETF tracking corresponding Bloomberg and ICE indices, with the ETFs rotating into short-dated sovereign bonds during the final year “to maintain some yield and mitigate cash drag”, until being redeemed and delisted once they hit their target date.
BlackRock’s decision to launch target maturity ETFs in Europe comes 13 years after it debuted its first iBonds ETFs in the US in 2010, with the range seeing $13.3bn inflows between the start of 2022 and the end of July this year.
2. JPM Global Equity Premium Income UCITS ETF (JEPG)
Next, ETF Stream revealed JP Morgan Asset Management (JPMAM) brought a global equity rendition of the most popular US-listed actively managed ETF to Europe.
JEPG launched in December to provide global equity exposure with lower volatility than its benchmark – the MSCI World – in addition to consistent 7-9% income per year.
Portfolio managers Piera Elisa Grassi and Nicolas Farserotu will take small overweight and underweight positions in companies versus its benchmark. Income is then generated through an options strategy implemented by JPMAM’s equity solutions team – headed up by Hamilton Reiner – which involves selling index options on the S&P 500 and MSCI EAFE against JEPG’s portfolio.
The ETF is a global equity, Europe-listed iteration of the $30bn JPM Equity Premium Income ETF (JEPI), which is also overseen by Reiner and has enjoyed $13bn inflows so far in 2023.
JPMAM said JEPG can “complement or substitute” existing yield-paying strategies and act as an alternative source of income to high yield bonds, with equity instead of duration risk.
3. HSBC Global Sukuk UCITS ETF (HBKU)
Our third ETF launch in the spotlight saw Shariah-compliant investors gain a route into fixed income via Europe’s first sukuk ETF.
HBKU debuted in September as an ETF share class of an index fund that launched in January, capturing the FTSE IdealRatings Investment Grade index of 64 sukuk across sovereigns and investment grade corporates.
Sukuk, often called ‘Islamic bonds’, are often issued by Islamic corporations and sovereigns to raise capital without issuing interest-bearing products such as conventional bonds.
They require the ETF issuer to sell a ‘trust certificate’ to investors and use proceeds to purchase an asset linked to a specific activity, requiring the issuer to set up an offshore special purpose vehicle which issues the certificate to investors.
The funds will then be invested via a funding agreement with the issuer which is contractually obliged to buy the bond back a set future date at market value.
Like bonds, sukuk provide investors with regular income; however, this is generated from the profit on underlying assets rather than interest rates.
HBKU is comprised of BBB-rated issuance, with sovereign issuers including Saudi Arabia, United Arab Emirates, Indonesia, Malaysia and Qatar.
4. VanEck Defense UCITS ETF (DFNS)
Our penultimate ETF marked the arrival of Europe’s first defence sector ETF which launched at the end of March, ETF Stream revealed.
DFNS tracks the MVIS Global Defense Industry index of 28 companies deriving at least half of their revenues from defence and aerospace hardware, communications, satellites, security and IT, unmanned aircraft, simulation technology and biometric scanners.
Aside from its thematic approach which means it broaches into tech subthemes alongside military hardware, DFNS also applies a range of ESG criteria including outright exclusions of companies in violation of UN Global Compact principles as well as involvement in controversial weapons.
Regrettably for those seeking out a pure-play military hardware exposure, DFNS excludes notable players including Lockheed Martin, RTX – formerly Raytheon – BAE Systems and Heckler & Koch.
However, the decision to apply such exclusions has made the product palatable to ESG-minded investors seeking to capitalise on the geopolitical tailwinds driving the defence industry. As well as being the first of its kind in ETF format in Europe, DFNS has seen relative success for a niche thematic strategy, with $108m inflows in under nine months.
5. Global X S&P 500 Covered Call UCITS ETF (XLYU)
Rounding off our list is the most popular of a string of defensive launches this year by Global X, spanning covered call, quarterly tail hedge and buffer ETFs.
Listing in July, XLYU tracks the Cboe S&P 500 BuyWrite 15% WHT index – a synthetic strategy that sells covered call options with underlying exposure to the S&P 500, designed to generate steady income during volatile periods.
The ETF relies on covered calls, a process involving selling a call option on a stock that one already owns, protecting them on the downside while also limiting upside if the stock rises.
While such strategies may lose their lustre during periods of strong US equity gains, for some investors the suite offered by Global X provides a key set of tools more managing volatility and downside risk.
XLYU becomes the second covered call launched by Global X after it launched an equivalent strategy covering the Nasdaq 100 index last November.
It also comes a decade after the firm launched the same strategy in the US, which has gone on to amass $2.9bn assets under management.
Its arrival – among others in the Global X suite – shows European investors are slowly but surely catching up to the ETF optionality enjoyed by investors across the Atlantic.