ETF Growth Trends Highlight ESG, Strategic Beta

Brown Brothers Harriman & Co., an exchange-traded fund (ETF) custodian and administrator, has released its year-end ETF market analysis in partnership with ETF.com.

For the first time in the survey’s five-year history, “expense ratio” was ranked as the top criteria for ETF selection. According to data provided by the firms, nearly two-thirds (64%) of advisers and institutional investors ranked expense ratio as “very important” when selecting ETFs, ahead of the nine other factors evaluated for importance. Expense ratio ranked second among the most-important factors in the 2014, 2015 and 2016 surveys, and third in 2013.

The latest edition of the annual survey, which measures the expectations and preferences of “sophisticated ETF investors in the U.S.,” found greater interest in environmental, social and governance (ESG) ETFs, with 51% of investors finding ESG at least somewhat important versus just 37% last year.

According to the firms, these investors also showed a greater intention than in prior years to use actively-managed ETFs for emerging markets equity (54% in 2017), international developed markets equity (45%), U.S. equity (44%) and commodities (31%). On the other hand, fixed-income active ETFs (6%) declined in popularity.

“Expense ratio ranked as the top selection criteria for ETF investors for the first time in our survey’s five-year history, this year coming in ahead of index methodology, historic performance, tax efficiency and other factors,” observes Shawn McNinch, global head of ETF services for Brown Brothers Harriman. “Expense ratio also ranked above all other criteria in selecting actively-managed ETFs. This reflects a continuation of the trend toward low-cost investing that has been underway for some time, and it will be interesting to see how this evolves in 2018 and beyond.”

Overall, the survey results also point to increasing demand for emerging ETF strategies and an opportunity for established and emerging ETF managers to launch new, differentiated products, McNinch says.

Other key findings suggest the opportunity is ripe for smart beta products, but more industry education is needed: 65% view smart beta as a versatile, hybrid strategy, but one-third (34%) of respondents are still unfamiliar. At the same time, demand is up for multi-factor ETFs, and investors are concerned about bond liquidity. Finally, investors are waiting longer to add new ETFs to their portfolio, as 36% preferred to wait one to three years after launch before adding an ETF to their portfolio. 

The full survey report can be downloaded here.