On this episode of ETF Prime, host Nate Geraci had just returned from the Inside ETFs Conference and had some thoughts. So, he bounced some of his takeaways from the conference off of VettaFi’s head of research Todd Rosenbluth.
How Active Management is Changing the Landscape
The first big takeaway from the conference that Geraci cited was the feeling that the next five to 10 years in ETFs will look different than the past two or three decades. And the reason why is because of the continued growth and acceleration of actively managed ETFs.
Rosenbluth agreed. “Active management is going to play a huge role in the next five years of the ETF industry in many forms,” he said.
He cited such issuers as Capital Group Cos. launching its first actively managed ETFs last year, and now manages $10 billion in ETF assets. The actively managed JPMorgan Equity Premium Income ETF (JEPI ) is among the leading ETFs out there, with $25 billion in AUM. And just this week, BlackRock launched two actively managed ETFs, the BlackRock Large Cap Value ETF (BLCV) and the BlackRock Flexible Income ETF (BINC).
“That BlackRock is further embracing active ETFs is just a sign of the reality that we’re in right now,” Rosenbluth said. “So, I do think we’re going to see a lot of change.”
Added Rosenbluth: “We’re running out of firms that don’t have an ETF presence that are in the active management world.”
Innovation in Bond ETFs
Geraci and Rosenbluth also discussed the innovation found within bond ETFs. Geraci cited the success of F/m Investments as an example of investors responding well to this innovation. Since launching its first suite of products in August 2022, F/m Investments has grown its asset base to $1.6 billion.
Rosenbluth noted that it’s only been in the last few years that the industry has seen innovation with bond ETFs. In addition to funds like the US Treasury 3 Month Bill ETF (TBIL ) gaining momentum, the BondBloxx Bloomberg One Year Target Duration US Treasury ETF (XONE ) is also massively popular.
“BondBloxx has also been innovative in slicing the high yield market notably,” Rosenbluth said.
Rosenbluth also noted that years ago, people thought investing in the loan market through ETFs was dangerous because they lacked sufficient liquidity. But “we haven’t seen that happen,” he said.
“There is just an appetite for narrow slices of the marketplace,” Rosenbluth said. “If you want it in the ETF space, there’s certainly going to be a product that’s there.”
Leveraging AI to Enhance Returns
ETFs that leverage artificial intelligence (AI) as part of their investment process was another theme that Geraci noticed from the conference. The recently launched Generative AI & Technology ETF (CHAT )* is a prime example of this.
Rosenbluth had attended the NYSE bellringing with Qraft Technologies, which launched the QRAFT AI-Pilot U.S. Large Cap Dynamic Beta and Income ETF (AIDB). So, he agreed, “There’s an opportunity here, both in proving that there can be performance and value added, but also there can be investor interest.”
He noted, however, that there hasn’t been a lot of investor interest in these ETFs to date. The AI Powered Equity ETF (AIEQ ), for example, had so far seen limited assets. But Rosenbluth suggested that may be an awareness issue.
“I just think people don’t know about them,” Rosenbluth said. He added that he thought many advisors are open to this type of investing the more comfortable they get with AI and what it can do.
He added that the downside to AI-driven ETFs “is you can’t ask the AI why it bought what it bought the way that you can ask the manager of JEPI as to why they own individual stocks.”
Still Bullish on ESG Funds
The industry overall seems bullish on ESG ETFs from the conference floor, which surprised Geraci. He noted, however, that it also feels like the “greenwashing” products are going to be a very tough sell going forward.
Rosenbluth admitted he and Geraci are of different minds when it comes to growth opportunities for ESG. And with that, he cited a few interesting products that have recently come out that are getting engagement on VettaFi’s Explorer platform.
For example, the KraneShares Global Carbon Strategy ETF (KRBN ) is quite popular this year. Plus, the Harbor Corporate Culture Small Cap ETF (HAPS ) crossed $1 million in AUM only a month after launching. VettaFi has also seen several issuers launching funds focused on gender equality and diversity.
“So, whether or not advisors continue to show engagement in slices of ESG… I think there’s a role for these products within this industry,” Rosenbluth said.
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