A Year-End Report Card For 2020 ETF Industry Predictions

By David Mann, Head of Global Exchange-Traded Funds (ETFs) Capital Markets, Franklin Templeton

As a very difficult 2020 draws to a close, David Mann, Head of Capital Markets, Global Exchange-Traded Funds (ETFs), once again looks back on some of the industry trends he had predicted would likely unfold this year. How many came to fruition? And which missed the mark? Read on.

I must admit this year it was a little harder to put pen to paper for my prediction columns - both for this one that looks back on my 2020 predictions as well as my 2021 predictions, which are coming soon. For example, there is no way I would have ever predicted that I'd be writing this column from my house, which is exactly where I have written every column for the past 10 months.

Industry-wise, this was a monster year for ETFs - as of the time of this writing, we are closing in on $485 billion of net inflows in the United States.¹ That is certainly going to help my first two predictions, which were based on assets under management (AUM) aspirations. On to the report card:

1. Active fixed-income ETF assets will reach $110 billion

Grade: B+

This one is going to be very close, as the trends have played out almost exactly as my team and I had predicted. First, we expected active fixed-income flows to slightly improve on the $21 billion number from last year - currently, that figure is near $27 billion.² We expected a bit of market appreciation within the asset class, which has also been the case.

The current AUM for active fixed-income ETFs is at $107 billion.³ In hindsight, I was probably a little aggressive in adding the extra $10 billion in my prediction. However, we are knocking on the door of $110 billion, and the year is not quite over. Not quite an "A" grade, but pretty darn close, IMHO.

One more comment on active ETFs before moving to the second prediction. In 2020, the acceptance and adoption of active ETFs overall is most certainly increasing. We speculated that with the adoption of the "ETF Rule," investors would better appreciate that there is no operational difference between active and index funds. That was certainly evident in the flows this year. Although active ETFs still do not represent 3% of all assets, they represented 10% of the 2020 inflows.⁴ That is a very exciting trend!

2. We will see more smaller funds make the leap

Grade: A-

I think one of the reasons that folks enjoy my prediction columns is that they get a break from my usual prattling on about ETF liquidity!

As time goes on, more and more investors should appreciate that the size of the ETF does not limit its ability to trade large amounts efficiently. We have certainly discussed this concept repeatedly within these pages.

As investors become more comfortable with trading smaller funds, I believe we should see more and more smaller funds make significant AUM leaps.

In 2019, I was surprised to see only 10 funds with an AUM under $200 million to start the year then finish the year over the $500 million milestone. I had predicted that out of the almost 1,500 funds that fit this criterion at the start of 2020, 25 would make the leap. As it turned out, I was way too conservative - 40 funds made the jump from below $200 million to over $500 million in 2020!⁵

This even included one of our own, as the Franklin Liberty Short Duration U.S. Government ETF (FTSD) went from $166 million to over $500 million.⁶

Maybe all of our discussions on ETF liquidity are starting to resonate!

3. We will see a non-transparent ETF reach $500 million

Grade: C+

The first year of non-transparent ETFs is almost in the books after years of speculation and discussion of their game-changing ability within the ETF ecosystem. Overall, I think it is OK to declare this year a success by two main metrics:

• There are currently 15 non-transparent ETFs totaling almost $910 million of AUM utilizing three of the approved non-transparent structures.⁷
• The intraday trading was efficient, with the three structures generally working as their designers had anticipated.

So, why the C+? Well, in hindsight, I should have made the 2020 prediction based on total AUM instead of the AUM for any one fund. And, given that only one fund barely crossed the $200 million milestone, I need to deduct points accordingly.

Overall: Much better than last year, all things considered. I hope everyone stays safe through the holidays! I will be penning my 2021 predictions next.

David Mann's comments, opinions and analyses expressed herein are for informational purposes only and should not be considered individual investment advice or recommendations to invest in any security or to adopt any investment strategy. Because market and economic conditions are subject to rapid change, comments, opinions and analyses are rendered as of the date of the posting and may change without notice. The material is not intended as a complete analysis of every material fact regarding any country, region, market, industry, investment or strategy.

What Are the Risks?

All investments involve risks, including possible loss of principal. Generally, those offering potential for higher returns are accompanied by a higher degree of risk. Stock prices fluctuate, sometimes rapidly and dramatically, due to factors affecting individual companies, particular industries or sectors, or general market conditions. For actively managed ETFs, there is no guarantee that the manager's investment decisions will produce the desired results.

ETFs trade like stocks, fluctuate in market value and may trade above or below the ETF's net asset value. Brokerage commissions and ETF expenses will reduce returns. ETF shares may be bought or sold throughout the day at their market price on the exchange on which they are listed. However, there can be no guarantee that an active trading market for ETF shares will be developed or maintained or that their listing will continue or remain unchanged. While the shares of ETFs are tradable on secondary markets, they may not readily trade in all market conditions and may trade at significant discounts in periods of market stress.

For more information on any of our funds, contact your financial advisor or download a free prospectus. Investors should carefully consider a fund's investment goals, risks, sales charges and expenses before investing. The prospectus contains this and other information. Please read the prospectus carefully before investing or sending money.

_________________________

¹ Source: Bloomberg as of 12/18/20.

² Ibid.

³ Ibid.

⁴ Ibid.

⁵ Ibid.

⁶ As of 12/18/20.

⁷ Source: Bloomberg, as of 12/18/20.

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Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.