2021 was a record-shattering year for ETFs as assets held in these products surpassed $10 trillion globally and attracted over $1 trillion in new assets. This surge in ETF assets, coupled with our survey findings, may point to another record year on the horizon: 84% of respondents expect to allocate even more of their portfolios to ETFs, the largest percentage in our survey’s history. While the mutual fund market still dwarfs ETFs, the difference in assets shrinks every year.

The path investors take in selecting ETFs may be shifting as well. Over 50% of respondents use model portfolios created by ETF issuers and third-parties. The model portfolio manufacturers rely heavily on ETFs as their underlying building blocks and perform their own due diligence of ETFs, a key distribution consideration for managers bringing new ETFs to market. Investors also appear to be slightly more selective in terms of minimum AUM of ETFs they may use. 41% of investors globally seek at least $100 million in ETF AUM tracks with 43% in 2021, however we saw an uptick in respondents looking for at least $250 million (11% in 2022 vs. 7% in 2021). 

Interest in active ETFs shows no sign of abating. They represented about 10% of global net inflows in 2021, driven mainly by U.S. investors. Our survey shows a pronounced uptick in investors’ planned allocation to active ETFs globally, with 78% of respondents planning to increase their exposure to active ETFs this year (up from 65% in 2021).

This year’s findings regarding the usage of active strategies highlight how portfolio construction is evolving. Defined outcome ETFs topped our respondents list when asked in which categories they want to see more active strategies. This suggests investors are looking for low cost, liquid hedging tools in their portfolios in 2022. Meanwhile, defined outcome strategies are yet to be adopted in Europe. Global equity also ranked highly, highlighting that specialization in foreign markets could be a differentiator for active ETF managers. 

Managers need to be patient in growing these strategies, however, as investors cite trading volumes, manager tenure and performance track record as key concerns when investing in active ETFs. While markets like the U.S. have seen growth in active ETFs over the past decade, these products are nascent in other geographies such as Greater China, where regulators are evaluating the opportunity to expand product strategies in actively managed ETFs.

Investors continue to pivot to thematic ETF investing following significant interest over the last few years. Global thematic ETFs saw net inflows of $80.5 billion last year, according to ETFGI. Last year, BBH noted that thematic ETFs were no longer a fad and we see that notion continuing this year: 85% of global ETF investors said they plan on increasing exposure to thematic ETFs and 38% of investors plan to allocate 11-20% of their portfolio to thematics, an increase of 4% from 2021.

Technology-focused thematic ETFs, including cloud computing and cybersecurity products, continue to command the most interest across investors, with 64% planning to add technology/internet strategies to their portfolios this year. Other areas worth noting include robotics/AI, healthcare, and autonomous and electric vehicles. Notably, cannabis-themed demand appears muted against other themes, while ESG continues to attract attention, with 56% of respondents planning to add ESG exposures this year.

Finally, given the considerable gains in the value of digital assets throughout 2021, perhaps it is not surprising that 54% of global investors plan to add cryptocurrencies and digital asset-themed ETFs to their portfolio. With regulatory questions in this category still open – currently not permissible within regulated fund structures such as UCITS – and volatility to start 2022, this will be a thematic segment to watch closely.

Given an outlook of rising inflation, central bank policy divergences and the potential for increased market volatility⁸ we expect fixed income will be an area to watch in 2022. In a sign of the strong structural performance of fixed income ETFs during the pandemic, 78% of global investors appear poised to increase fixed income allocations. European investors appear to have the lowest weighting to fixed income, with 75% of respondents allocating 40% or less to bond ETFs.

In Greater China, an increasing number of institutional investors are turning to fixed income ETFs given the flexibility of the wrapper for different strategic or tactical use cases. In 2021, Greater China accounted for 65% of net new flows into bond ETFs across APAC, excluding Japan. 60% of all investors surveyed in Greater China have allocated more than 30% of their portfolio to fixed income, with the greatest commitment coming from institutional investors (almost 80% of institutions have allocated more than 30% of their portfolio to fixed income ETFs).

ESG-oriented ETFs took part in the growth of the ETF market last year, where they pulled in close to $120 billion. Europe continues to be the engine for global ESG growth, where 51%⁹ of the region’s aggregate ETF flows went into ESG ETFs last year.

Europe also continues to lead the way in the regulation of the ESG market. Increasingly, respondents have highlighted the lack of consistent methodologies in ESG as a concern (19% in 2022, up from 13% in 2021). In 2021, the EU implemented the Sustainable Finance Disclosure Regulation (SFDR), which includes classifications seeking to make it easier for investors to compare different funds along consistent criteria. For our 2022 survey, we sought to see if these regulations make an impact in ETF selection. 

SFDR classifications rated the highest ESG screening tool for European respondents. For those who use these classifications, 74% of respondents stated that they select either funds classified under Article 8 (which promote ‘environmental and social and good governance characteristics) or Article 9 (financial products with sustainable investment) as its objective. While the regulations are relatively new, the interest should be noted by managers offering ETFs in the European marketplace.    

While there are headwinds and regional nuances, the ESG segment is clearly gaining momentum. With the Biden administration re-joining the Paris Agreement, the implementation of initiatives such as the “Green Deal” in Europe and China’s objective of carbon neutrality, ESG is likely to firmly stay in the political spotlight, potentially pointing to a very green future for ESG ETFs.