2023: The Year in U.S. ETPs
Part 2 - A tale of three products
Steven W. Poser
Director of Research
Published
January 17, 2024
Last week we summarized 2023 big picture trends in U.S. ETPs. While the two largest categories in terms of assets under management (AUM) and volume are equity and fixed income ETPs, three important stories were around the growth in actively managed products, the loss of momentum in ESG ETPs, and the drama around approval of listed spot cryptocurrency from the SEC.
Actively Managed ETPs
Actively managed ETPs continued to attract strong interest in 2023. Although only representing 6.6% of total ETP AUM, these products garnered $137.2 bn in flows - 22.5% of total flows for the year1. More than 1/3 of all U.S. listed ETPs are now actively managed.
There are three basic types of actively managed ETPs - fully transparent funds and two types of semi-transparent products:
- Fully transparent - These funds fully disclose their holdings every day and publish an indicative value throughout the day based on their actual holdings. More than 98% of active AUM is invested in fully transparent funds.
- Proxy Portfolio - These funds do not disclose their full list of holdings. The funds create a proxy portfolio, that includes a subset of their holdings, as well as additional securities so that the proxy portfolio very closely tracks the actual valuation. There are several proxy portfolio models. Some base intraday values on the proxy portfolio, while others based them on the fund’s actual holdings.
- Authorized Participant Representative - The fund’s actual holdings are only disclosed on a quarterly basis, like mutual funds. There is a trusted agent who handles all creations and redemptions and handles the actual portfolio, which is not publicly available. Intraday values are based on the actual portfolio.
Chart 1: U.S. - Active ETP AUM by Asset Class2
In Part I of our 2023 ETP review we posited that high interest rates and the narrow list of U.S. equities that made gains through the first three quarters of 2023 resulted in relatively stronger than typical flows into fixed income funds compared to equity funds. The ability to select active managers who could overweight strongly performing stocks likely allowed actively managed equity ETPs to garner the lion’s share of 2023 flows relative to passive equity ETPs. By the end of 2023, 62% of active AUM was held in Equity funds, compared to 32% in fixed income, 3% in multi-asset and 2% in commodities. Nearly 76% of fund flows went to equities, with 24% going to fixed income. Commodity funds suffered outflows of $870mn.
Chart 2: 2023 Active ETP Fund Flows
ESG Funds3
After years of strong growth, Environmental, Social and Governance (ESG) focused funds lost favor in 2023. The combination of three quarters of stock market gains focused on a small group of stocks4, coupled with shifting sands in tracking and measuring ESG factors5, likely impacted this ETP category. The result was that ESG funds saw an outflow of $4.8 bn this year, ending with $118.6bn AUM. AUM increased 9.3% from 2022, on the back of overall positive markets.
| ESG Strategy | AUM Change | Flow ($ Billions) |
|---|---|---|
| Best-in-class | -12.8% | -$2.45 |
| ESG thematic strategy | -0.5% | -$1.54 |
| Exclusion screening | 29.6% | $0.87 |
| General integration | 13.5% | -$1.68 |
| Total | 9.3% | -$4.81 |
Cryptocurrency
Writing about 2023 Cryptocurrency ETP activity feels a bit “so yesterday” after the SEC X-account hack and next day approval of cash bitcoin ETPs, followed by the successful launch of ten products on January 11. We will give an overall update on the Crypto ETP world in the coming weeks. A brief preview: We do not believe that futures-based ETPs are going anywhere, but cash ETPs will likely trade more.
Cash bitcoin ETPs captured more than 20 times the AUM of the futures-based crypto products on their first day of trading on January 11, 2024. The Proshares Bitcoin Strategy (BITO, NYSE Arca-listed) ETP averaged ten million shares traded per day last year, holding more than 80% of the industry AUM, controlling $1.7bn of the $2.1bn industry-wide total at year-end. BITO also accounted for $568 million of the $798 million fund flows for the year. Since the launch of the cash bitcoin products, BITO volume has surged, possibly due to futures-cash arbitrage and as a hedge for market makers.
Average daily volume for the year was 12.7 million shares across all crypto ETPs but rose to more than 20 million in December as bitcoin rallied in anticipation of the SEC approving the cash products.
Chart 3: Futures-based Cryptocurrency ETP CADV6
Conclusion
We consider, with our always perfect 20/20 hindsight, the two biggest stories in ETPs in 2023 were the continued stellar growth in actively managed ETPs and the anticipation of cash bitcoin products. Certainly, for the early part of 2024, these two will continue to dominate the headlines in the industry.
ESG funds meanwhile appeared to lose favor. However, we think these funds remain an important category in the ETP pantheon and will likely continue to attract interest as companies and governments continue to focus on climate change and other ESG causes.
- Cryptocurrency, currency and volatility combined were 0.83% in 2021, 0.48% in 2022 and 0.67% in 2023
- All AUM and Flow Data Source Track Insight
- ESG Strategy definition source is Track Insight
- Approximately 90% of ESG AUM is in equity funds, with about 10% in fixed income and less than 1% in commodities.
- ICE offers detailed ESG and sustainability metrics. More information.
- Source: NYSE Research