While much ink has been spilled on spot bitcoin ETFs, there are plenty of other topics that industry watchers will be keeping an eye on in 2024.
Among them are applications for ETF share classes of actively managed mutual funds; how the ETF manager leaderboard might shift this year amid the rise of active ETFs; and whether, as expected, cash parked in money market funds will provide a tailwind for ETFs.
"PGIA, Dimensional and Fidelity have all filed to launch an ETF share class structure of their mutual funds," said Nate Geraci, president of The ETF Store, an investment advisory firm specializing in ETFs, and host of the weekly podcast ETF Prime. "I think that's a potentially enormous story in the ETF space."
In February 2023, Perpetual US Services, which does business as PGIA, announced the filing of an exemptive application with the Securities and Exchange Commission seeking an order that would permit PGIA and its affiliated U.S. investment advisers to establish an ETF multishare-class structure of their respective mutual funds.
The PGIA filing came just months before the May expiration of a patent held by Vanguard Group. Starting in 2000, Vanguard began operating index-based ETFs as share classes of its index-based mutual funds in accordance with an order from the SEC that was "substantially similar to the one sought by Applicant," PGIA's filing said.
Dimensional Fund Advisors filed its application for exemptive relief in July, while Fidelity Investments filed in October.
The challenge will be getting the SEC on board, Geraci said, adding that Vanguard is only approved to use the ETF share class structure for its index-based products while PGIA, Dimensional and Fidelity are seeking to use it for actively managed products.
"Active ETFs have exploded in recent years," Ryan Jackson, a manager research analyst, passive strategies for Morningstar, said in a Nov. 13 article, which said that many mutual fund providers that entered the ETF market in recent years cite what's known as "the ETF Rule," which the SEC approved in 2019, as the catalyst. Rule 6c-11 allows fund providers to create and redeem ETF shares with custom baskets, Jackson said.
However, the SEC said in 2019 that ETFs structured as a share class of a multiclass fund wouldn't be able to rely on the rule, citing concerns regarding how portfolio costs would be borne.
"For example, an ETF share class that transacts with authorized participants on an in-kind basis and a mutual fund share class that transacts with shareholders on a cash basis may give rise to differing costs to the portfolio," the SEC said. "As a result, while certain of these costs may result from the features of one share class or another, all shareholders would generally bear these portfolio costs."
Geraci said that if, for instance, the mutual fund share class had substantial outflows, "that could trigger negative tax consequences and higher transaction costs for ETF shareholders."
However, the "bigger picture" when it comes to ETF share classes of mutual funds involves the retirement plan market, and 401(k) plans in particular, he said.
"That's an extremely lucrative business for mutual fund companies and I would say it's really the last bastion for mutual funds," Geraci said. "Mutual funds have lost market share pretty much everywhere else except in that retirement plan space."
The ability to add an ETF share class to a mutual fund "would allow mutual fund companies to maintain that lucrative cash cow business while also pursuing the much higher growth ETF market," he said.
While there have been plenty of mutual fund-to-ETF conversions, "those are only applicable (for) products that have minimal if any retirement plan assets, otherwise they can't convert," Geraci said, adding that "most 401(k) plans are not set up to hold ETFs."
And, while fund firms can also offer ETF clones of their mutual funds, that's also not as optimal as having the ability to add an ETF share class, he said.
"Clone strategies don't offer the type of operational efficiencies that a multishare-class structure would just in terms of sharing back-end operating cost and distribution cost, and then just the tax efficiency within the fund itself," Geraci said. "And so, this ETF share structure could be a huge deal."
Bloomberg Intelligence Senior ETF Analyst Eric Balchunas predicted Fidelity, one of the applicants seeking an exemption, can break into the top 10 ETF issuers in the U.S. by assets by the end of 2024, he said.
"Currently, they're 13th," said Balchunas, who expects to see "some big things from them," this year.
"It feels like they've got more buy-in internally to do the ETF business, and they've got so many quick ways to get giant assets over," he said, adding that one would be converting mutual funds to ETFs, something Fidelity has already done.
Fidelity's ETF lineup consisted of 64 funds with assets under management totaling $51.7 billion as of Dec. 31. According to VettaFi, VanEck is the 10th largest ETF manager with $66 billion in assets.
The ability to offer ETF share classes of its mutual funds would be a "huge" way for Fidelity to build its ETF assets, Balchunas said.
"I kind of look at all these things as tributaries, and they all sort of flow into the ETF world and Fidelity is really starting to work these tributaries," he said. "They have so much money that they could grow really quickly in terms of assets."
Balchunas also noted that Fidelity is among the firms seeking SEC approval for a spot bitcoin ETF.
"And they have this army of advisers," he said. "I would think those advisers would probably be great customers for the bitcoin ETF."
Greg Friedman, head of ETF management and strategy at Fidelity Investments, said ETFs are a "strategic priority" for the firm, which launched its first ETF in 2003.
Active ETFs have "finally come to the forefront," and that's where Fidelity, with its research capabilities and 75-year-plus investing heritage can add the greatest value, Friedman said.
"Fidelity has been in the game for a while, has seen where the industry is going and I think you see the increase in our presence because this is a time that we think we can add the most value and differentiate (ourselves for) our clients," he said.
Asked about plans for 2024, including whether Fidelity plans to roll out any new ETFs, Friedman declined to provide specifics.
"We have a huge road map of ideas on the blackboard," he said. "I can't go into what we're thinking and what we're going to do, but we are committed to being a leader in this space."
The global ETF industry is entering 2024 with a freshly minted record for assets under management, according to ETFGI, a London-based research and consultancy firm.
Assets invested in the ETF industry globally are reached $11.63 trillion as of the end of 2023, besting the previous record of $10.99 trillion set at the end of November, ETFGI said.
Noel Archard, global head of ETFs and portfolio solutions at AllianceBernstein, expects 2024 to be a strong year for ETFs given his expectation that some client money that's been parked in money market funds will begin to deploy back into either fixed income or equities.
"And anytime we see that redeployment, ETFs tend to get a pretty heavy piece of that flow," Archard said. In a February 2022 news release announcing Archard's hiring, AB said it planned to build a global ETF business under him and that he would be responsible for "bringing AB's diverse set of investment capabilities to the active ETF marketplace."
Archard expects investor appetite for active ETFs to remain strong in 2024.
"I think that the active ETFs are going to continue the trajectory they're on, which is capturing a disproportionate share of the flow relative to our footprint from an AUM perspective," he said.
While investors for many years have had plenty of choices available to them in the "beta end of the ETF world," many active ETFs are just starting to come up on their one-, two-or three-year track records, "which obviously is important" for an active product, Archard said.
"You're looking not only at what's attractive about the vehicle or the structure, but what's attractive about the investment strategy that you're going into," he said. "So, for some of the strategies that have been out for a couple of years and now have a track record, I think you're going to see continued engagement there from clients."
As of Jan. 5, AB had 12 ETFs with assets under management totaling $1.5 billion.
