What's Next for ETFs in 2024: VettaFi's Rosenbluth

The exchange-treaded fund market will soon be 30 years old, and 2024 could represent one of the most dynamic years yet for the investment vehicle, according to Todd Rosenbluth, head of research at VettaFi.

Rosenbluth spoke with ThinkAdvisor about this and other big market trends ahead of the firm’s upcoming Exchange conference, which begins Feb. 11 in Miami.

As Rosenbluth explained, the goal of the conference, for many advisors, will be getting up to speed on what has happened in the ETF space in recent years — along with gaining insights about the markets in general for 2024 and enjoying a healthy dose of fun and networking, too.

According to Rosenbluth, the start of 2024 represents an exciting time in the ETF industry, both from a market performance and a competitive standpoint. As of the time of the conversation in mid-December, two ETFs stood above the rest. These were the Vanguard S&P 500 ETF, which hoovered in $39.5 billion of new money in 2023, per VettaFi’s LOGICLY data, and right behind was the iShares Core S&P 500 ETF, which gathered $35.4 billion.

As Rosenbluth noted, both ETFs have a “miniscule fee” of 0.03% and are supporting many advisors allocating for 2024. Meanwhile, the SPDR S&P 500 ETF pulled in $13 billion, and its institutional appeal could help it narrow the gap next year. While broad market-cap-weighted ETFs were most popular, there were some smart beta ETFs gaining traction in 2023, and new active funds also saw burgeoning interest.

Looking to 2024, (some) investors are also awaiting the launch (or SEC rejection) of the industry’s first spot bitcoin ETFs, and there are big questions about how the U.S. and global economies may fare as interest rates either remain higher or begin to fall throughout the year.

Ultimately, 2024 is likely to represent one of the most interesting years for ETFs since their inception, Rosenbluth suggests, and it is beholden on advisors to keep abreast of all the changes.

Here are highlights of our conversation:

THINKADVISOR: What do you make of the very strong performance posted by some ETF managers in 2023? Some funds even beat the S&P 500. Was this a surprise to see?  

Todd Rosenbluth: So, the first thing to say is that 2023 has been a year when higher quality investments have done relatively well, and despite the stock market being up in general, there’s a lot of uncertainty within certain sectors.

As we have had rising interest rates throughout the year, we have also had slower earnings trends, and so that has propelled the performance in higher quality investments. Those companies that have strong balance sheets, consistent cash flow and consistent earnings records have done relatively well this year.

We have seen very good performance among funds with this kind of a focus — with a high quality approach.

Something that has been exciting to see is how different asset managers are coming into the space, including managers who are bringing more active management. It’s still early days for actively manage ETFs, but advisors have been turning to active management for years.

They now have more choices in an ETF structure, and it’s great to have players like GMO or DoubleLine bringing their best investment ideas into the ETF world.

Where does the ETF industry stand today with respective to the use of active versus passive management?

So, roughly 5% of assets in the ETF market, in terms of assets under management, are currently actively managed. The rest track an index or are spot ETFs that track commodities like gold or specific sectors.

However, we saw about 25% of the money that has gone into ETFs in 2023 going into actively managed ETFs. So, actively managed funds have been punching above their weight in terms of inflows.

In general, investors are turning to them. Many advisors have believed in active management for years, but they have used mutual funds as the way of getting that exposure. As model portfolios have become more prevalent, and now that active ETFs have become more prevalent, we are clearly seeing greater adoption of active ETFs, including in model portfolios.

How do cost-conscious ETF investors tend to react to the higher fees for active management?

Well, the good thing with active ETFS is that their fees aren’t actually that much higher, but it is clear that the active ETFs that are gaining the most traction tend to have expense ratios that are below 40 basis points.

Yes, you can get passive S&P 500 exposure for two or three basis points, whether from BlackRock, Vanguard or State Street.

But we are seeing advisors turning towards active funds that they might have used beforehand in the mutual fund space, for example funds from Dimensional, which is now the largest actively managed ETF provider. Their ETFs are relatively cheap.

Do you expect concentrated performance to continue to be a challenge for investors in 2024, as it was in 2023?

To state the obvious, I think that 2024 is going be different than 2023. Each year in the markets is going to be unique, and to use the phrase, past performance is not indicative of future results.

In 2024, I think that we’re going to see a bit of a reversion to the mean — so we will see more stocks participating in the performance. We also think it’s more likely that, if and as interest rates come down, bond yields are likely to come down. They have actually already started to do so as a result of the Federal Reserve’s messaging.

In this environment, I think more value-oriented, more quality-oriented, more dividend-paying stocks will be more relevant.

What other fixed-income trends are you tracking for 2024?

So, we are always talking with advisors, and one thing they are telling us is that they are willing and eager to take on some interest rate risk next year. They have spent 2023 largely hunkered down and getting rewarded for owning short-term products with less interest rate sensitivity as the Fed has been raising rates.

Even if we are stable with rates, but even more so if rates start to fall at some point during 2024, we think advisors are willing take on that risk and get rewarded for it. So, 2024 will likely see advisors embrace more intermediate-term products.

Any thoughts about the pending spot bitcoin ETF applications and the SEC’s approval?

This is still very early days for such products, but it does signal a potential paradigm shift.

To begin with, we expect that we are very close to having the first spot bitcoin ETFs coming online in the markets. My personal view is that they will get approval here in the U.S. early in 2024, likely before our Exchange conference, in fact.

What this will mean for advisors and their clients is an open question. As you know, bitcoin is not part of what makes sense to many advisors. It’s not in their practice.

But for some advisors, clients are asking about it, and they’re thinking about this opportunity carefully. What is clear is that a spot bitcoin ETF will make it more efficient to own bitcoin — to get exposure to it from a recordkeeping standpoint instead of going direct.

So, I think approval is going to cause a swell of money rushing into bitcoin ETFs overnight, but I do think that in 2024, we are going to see advisors begin to dip their toe into the strategists that are coming.

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