Latest Thinking on Indexation, Active vs Passive and ETFs.
Demand for 'traditional' indexed or passive products continues largely unabated. Refinitv Lipper data suggest that global ETFs received $1.22 trillion in inflows in 2021, with ETF assets at year-end 2021 close to $10 trillion. Interestingly, the range of choice for asset managers has increased, with over 1,300 ETFs launched last year, twice the number in 2020. ESG and thematic approaches were popular, with ESG ETFs gaining almost $120 billion in inflows during 2021 compared with $79.3 billion in the prior year. Many asset owners cite costs and performance as their prime motivation for choosing indexation when surveyed. With some ETFs charging under 10bps, it can be difficult to contest the argument.
Several of the papers in this selection highlight issues associated with indexation and benchmarking. S&P Dow Jones Indices suggests an alternative to cap-weighted indices, where sector and stock concentration issues have been to the fore. They also highlight how difficult it is for active managers to outperform the S&P 500 when the median stock underperforms, and it's just a few 'star stocks' that drag index returns above most constituents. FTSE Russell shows how ESG tilts in a portfolio can significantly impact tracking error or performance. Dimensional Fund Managers notes the blurring between active and passive philosophies, with active managers often using passive fund structures to gain exposure to themes or ideas they think are mispriced.
S&P Dow Jones Indices notes investor concerns about the degree of concentration in cap-weighted indices, and in this paper suggests an alternative method to measure concentration.
Liberty Street Economics suggests a new gauge for supply chain pressures, the Global Supply Chain Pressure Index (GSCPI, which may provide a more comprehensive measure.
FTSE Russell’s paper looks at how ESG tilts can have a profound effect on tracking error and performance drift from an index or a benchmark.
This paper offers evidence of bias towards carbon intensive companies in value weighted indices, index funds and ETFs in both the U.S. and Europe, which is far higher than that of their respective economies.
Large U.S. public pension funds tend to hire lots of expensive external managers, most of whom fail to demonstrate any added value. In fact, in aggregate, managers underperformed stock and bond funds by over 1.5% p.a. over the last 12 years.
S&P Dow Jones Indices highlights the difficulty of most equity fund managers to outperform the S&P 500 because the median stock underperforms, and it is only a small number of outperformers that pull the index return above that of most of its constituents.
Dimensional Fund Managers outlines the blurring of definitions between active and passive investment philosophies, noting especially the growth in certain, often thematic ETFs, which by definition are passive in structure, but seek to focus on themes or ideas that investors think are mispriced.
This paper notes how different trading approaches by ETFs during rebalancing may lead to quite varied outcomes for investors over time.
S&P Dow Jones Indices investigates active management during different market environments, and finds that active managers tend to be challenged when dispersion was low – stock prices rose, and market leadership came from mega-cap stocks.
PwC’s report examines the key trends and issues in global and regional ETF markets that are likely to drive continuing growth in the next five years.