Once upon a time - a few years ago in fact - Citi Research analysts noted that the ETF industry was maturing as almost every passive index had already been replicated. They added that the industry needed to innovate to grow more.
Fast forward to now and what looks like a more differentiated looking ETF product is coming and the US-listed ETF ecosystem is now almost 3,200 products and more than $7 trillion in assets.
Post-pandemic, the analysts say, growth has picked up, driven by strategies that were once the preserve of mutual funds, hedge funds and other wrappers outside the ETF ecosystem.
The full report looks at how the ETF ecosystem is changing and also airs the views of Citi research analysts on the active management revival, industry opportunities, and potential headwinds.
US-Listed ETF Product Count, Since 2007
© 2023 Citigroup Inc. No redistribution without Citigroup’s written permission.
Source: Citi Research, Bloomberg, FactSet
US-Listed ETF Product Launches and Closures, Since 2013
© 2023 Citigroup Inc. No redistribution without Citigroup’s written permission.
Source: Citi Research, Bloomberg, FactSet
New launches have continued to be skewed towards equities but as equity ETF launches look set to flatten out or even slow down this year, fixed income product additions should continue to accelerate, the report says.
This is a sign of the times and could be the shape of things to come. Years ago, many fixed income markets lacked the market structure to support the underlying being wrapped into ETFs.
Evolution in areas of corporate credit trading have permeated asset classes including bank loans, CLOs, and some areas in the securitized market. This has likely led to more ETF launches in these categories.
US-Listed ETF Product Launches by Category, Past 2 Years
© 2023 Citigroup Inc. No redistribution without Citigroup’s written permission.
Source: Citi Research, Bloomberg, FactSet
The chart above looks at how innovation has been driving product launches across varies categories.
-Thematic equity ETFs have led launches over the past two years. Asset managers - active and passive - are finding new ways to slice and dice stock markets.
-Derivatives-based products in the defined benefit and options overlay categories are also now being wrapped into ETFs.
-More active managers are offering access to their expertise via ETFs in the Core/Core+ Fixed Income space.
-ESG product launches have been seemingly strong over the past two years, but the authors said they feel this trend is fading. Increasingly, they say. US focused asset managers have pushed these products to the back burner as client inquiry slows and regulatory and political pressure over defining ESG picks up.
Even with this product proliferation, the industry is concentrated.
US-Listed AUM by Issuer Size
© 2023 Citigroup Inc. No redistribution without Citigroup’s written permission.
Source: Citi Research, Bloomberg, FactSet
The top five issuers by assets control over 85% of the total US-listed ETF AUM. This hasn’t changed much as inflows into low-cost, first movers in the ETF space have continued amid market volatility. The team note, a strong focus on investor fees and proliferation of model portfolios fuels ongoing growth of big issuers.
For more information on this subject, if you are Velocity subscriber, please see the full report, first published on Oct 4th here ETF Perspectives - US ETF Industry: Maturing. Not Mature.
Citi Global Insights (CGI) is Citi’s premier non-independent thought leadership curation. It is not investment research; however, it may contain thematic content previously expressed in an Independent Research report. For the full CGI disclosure, click here.
