U.S. investors are showing no signs of slowing down their interest in ETFs. Assets invested in U.S. ETFs reached $9.2 trillion as of the end of June, according to ETFGI, a research and consultancy firm tracking the sector. For the month, ETFs in the U.S. gathered net inflows of $82.8 billion.
One of the recent trends in the ETF space is that a significant percentage of new launches are actively managed strategies. By some accounts, 70% of launches are actively managed ETFs, although active ETFs account for just 5% of overall ETF assets.
While the total assets of active ETFs are expected to grow, one underplayed theme is that a significant percentage of products that get launched never amass enough assets to make them viable, and many are eventually shuttered.
Morningstar, for example, found that asset managers launched 571 active strategies in 2023 but simultaneously closed 436 others.
Natixis Investment Managers, headquartered in Paris and Boston, is an asset manager that has worked to build out a suite of active ETFs. The asset manager offers five products built on both equity and bond strategies. Two of its recent launches, the Natixis Loomis Sayles Focused Growth ETF, launched about a year ago, and the Natixis Gateway Quality Income ETF, launched in December, have met success, amassing more than $200 million and $100 million in assets, respectively. (Although Natixis did recently shutter another ETF that had amassed less than $5 million in assets.
WealthManagement.com caught up with Natixis’ Nick Elward, senior vice president and head of institutional products and ETFs, to discuss the state of the ETF market as well as how Natixis is approaching fund launches in a competitive market.
This interview has been edited for style, length and clarity.
WealthManagement.com: What stands out to you from the first six months of 2024 for ETFs?
Nick Elward: There has been $360 billion in net flows. That’s a pretty good year. ETFs are on pace for over $700 billion in net flows. While that would not be the largest year ever, it is a bit better than the last few years. Unless something really positive happens, we’re probably not going to hit the record.
Drilling down into that, 70% of the $360 billion went into equity ETFs ahead of fixed-income or alternative ETFs. Compared to 2023, the percentage was about 64% for equities. So, there’s been a little more interest in equities this year. With the strong overall performance of equities in 2024, I’m not surprised by the flow breakdown.
WM: What about passive vs. active? There’s a lot of talk about that breakdown these days.
NE: It’s been a good year so far for active ETFs with about $117 billion in net flows. So active ETFs account for 32% of flows. If I look back to the last two to three years, active ETFs have been in the 25% to 38% range for net flows, so active ETFs are on pace for a good year.
Of that $117 billion, U.S. equity-based active ETFs account for a big portion at $37 billion and taxable bond ETFs are at $38 billion. Those are the two largest category groups in terms of where money is going within active ETFs.
WM: You recently wrote a piece projecting ETF assets would reach $10 trillion by the start of 2027. Where do we stand today at the midpoint of 2024?
NE: Total U.S. assets are at $9.1 trillion. I was being conservative when I said $10 trillion by the start of 2027. We have 2 1/2 years to get there. We played it conservatively, knowing that there would likely be some ups and downs along the way, and did factor in for some downtime in the market.
WM: Let’s talk about launches for a moment. You talked about some of the breakdowns in terms of flows. On the launch side my understanding is that active ETFs account for a very high share of launches.
NE: The number I saw this morning is about 70% of launches are active over passive. Total active ETFs are now at 1,500. When we first launched ETFs in 2016, there were about 150 active ETFs. There’s been an explosion in excitement around active ETFs. I also looked at all the underlying Morningstar category groups. At this more detailed level, large blend active ETFs are at $21 billion, ultra-short are at $13 billion, and derivative income active ETFs are at $11 billion.
From a large-blend perspective, that’s a big allocation in most investor portfolios. So, you can see why it would drive more flows to that category. But, if you look at the ratio of investor assets in passive/active in the large blend space, normally, you see a fairly large amount of passive, so the growth of active ETFs is notable.
In terms of ultra-short duration ETFs, a lot of investors have used these to more aggressively manage money that otherwise could be in the money markets or CDs. Some investors are interested in these active ETFs because there’s not a lot of duration risk, and they can still recognize good income.
Investors’ interest in derivatives-based ETFs is driven by their desire to generate income. This income is coming from options, equity-linked notes and other swaps-based income strategies. We have a product in that space, and it’s done really well.
WM: What about looking forward to the rest of 2024? Is there any reason to expect any shifts in these trends? Or, for example, would interest rate cuts perhaps change anything?
NE: I think it will look generally similar. Of course, we do have the election coming, and people are thinking about the implications the outcome may have on certain sectors or companies. I have seen some individual security and sector moves based on the assumption of a Republican administration winning.
But what I’m thinking about is the yield curve. It’s expected that rate cuts will happen in the second half of the year. If you think back to 2023, a lot of folks indicated there could be up to six rate cuts in 2024. That did not happen as inflation remained sticky. But if you are watching the yield curve—specifically as it relates to the two-year and the 10-year, we’ve been sitting with an inverted yield curve for 20 months. That’s a long time. It just seems so strange for an economy that’s doing well to retain that inverted curve.
It has flattened some. It’s now a 26-basis-point inversion after being a lot higher in the last year. I am encouraged that there is a flattening. As rate cuts happen, I think that might bring it back to a standard curve.
What that could mean is that with ultra-short strategies, a lot of people love to be as short as possible and be where they can get yield without much duration risk. But if we get rate cuts and a standard yield curve, some in money markets or ultra-short strategies may want to extend their duration a bit more. That’s something worth watching. Selfishly, we do have a short-duration ETF, LSST, and I’m hoping people find that again. It will have a stronger sales proposition in a normal yield curve environment vs. an inverted environment.
WM: Drilling down, what are some of the themes you are watching and how are they informing what Natixis is doing?
NE: When I talk to advisors who are interested in actively managed ETFs, they are often interested in “best ideas” products that are concentrated. They want to have conviction behind a select number of securities and have those choices make an impact.
One product for us is LSGR, the Natixis Loomis Sayles Focused Growth ETF. It has about $200 million in assets since we launched it about a year ago. It typically has a portfolio of 20 to 25 stocks that are growth-focused. We are set on picking a small number of securities and having them have a meaningful impact.
Another is GQI, the Natixis Gateway Quality Income ETF. That one is at $104 million in assets after launching it in December. I like to call this a “purpose product.” It’s for those investors that are seeking income in an ETF. The yield is between 7% and 8.5%, which is attractive to investors. They can begin to blend it alongside standard income-generating products. For us, GQI has been a great story in its first seven months. It’s managed by a group called Gateway, which is one of our nine U.S. Natixis affiliates. They have been running derivatives strategies since 1977.
WM: Can you talk a bit more about product development? How do you assess strategies? What are some of the factors you’re looking at when you’re coming up with new ETFs? We also talked a bit about launches earlier, but something that gets less attention is ETF closures. Many ETFs don’t make it. In terms of success, I’ve often heard the number of $20 million thrown around for a minimum for ETFs to be viable. The ones you just mentioned then seem very successful by that metric to reach those asset levels in a relatively short period of time.
NE: There’s a combination of factors that we think about. We’re trying to meet what the market is interested in and what our clients are interested in.
As one thinks about launching products, so many ETFs don’t get to scale and do have to be liquidated. For complete candor, we are also liquidating one of ours. We do have to prune every so often. One of our ETFs is at $4 million in assets, and we will be winding it down on the 30th of this month. So, we have a couple that have done great, but it doesn’t happen for every product.
As we research new ETF ideas, we watch the trends carefully and research new ideas. There are some big-bucket categories that we see some potential in, but right now, we have nothing we’ve filed with the SEC.
I still think there are opportunities in the equity space. When you talk about derivatives and purpose products, I think there’s more potential in derivatives-based income and derivatives overall. More investors have realized that the options market can be a powerful tool, providing peace of mind and enhancing portfolios and risk-adjusted returns. We will continue to research that carefully.
WM: With derivatives, you are introducing an additional layer of complexity, and complexity can often scare investors. How do you deal with that challenge?
NE: It takes more explanation. We’re up for that with our team to speak with financial advisors to tell them the story. That’s a key point, too. We sell through financial advisors. End investors may have more concerns about options or how derivatives pairings work. But if they have that intermediary who is able to explain, “the upside is X, the downside is Y,” that can ease concerns. If we were selling directly to investors, it would be harder. But thankfully with the distribution model we have, it lends itself to sell more sophisticated products.
WM: You also mentioned one of your affiliates. Can you explain the company structure and how the affiliate model works? Are these brands you are building or buying?
NE: We are owned by BPCE out of Paris, France. They have a business line that’s both retail banks and asset management. We are the asset management arm. We have offices in Paris and in Boston. The total assets for Natixis are about $1.2 trillion, with about half for non-U.S. investors and half for U.S.
The model that Natixis follows for affiliates is that we typically wholly own them. We have nine in the U.S. markets. The ETFs and mutual funds we launch are typically launched out of Natixis in partnership with the affiliates, who are the sub-advisors of the funds. In Europe and Asia Pacific, we have other affiliates. Overall, the total is over 20. In sourcing new affiliates for our family, we often seek out affiliates that have a unique investment capability.
WM: What is the interface like with advisors?
NE: With Natixis and our affiliate model, financial advisors are not working with different wholesalers from each of our affiliates. Instead of mutual funds and ETFs, Natixis’ distribution team represents the whole family and an array of brands. So that’s convenient for financial advisors.