The first exchange-traded fund (ETF) was launched 30 years ago in the US, the beginning of an industry that has grown exponentially to now holding nearly US$10 billion in assets under management. In honour of this milestone, Satrix’s Chief Investment Officer (CIO), Kingsley Williams has done some future-gazing to see what might be next for this innovation in investing that has fundamentally impacted the landscape.
South Africa, xx/xx 2023: By 2030, what will the ETF landscape look like? BlackRock forecasts the global exchange-traded fund (ETF) industry will grow to $25 trillion by then. Kingsley Williams, CIO at Satrix*, says ETF’s growth potential in South Africa is immense. Currently, index funds and ETFs account for over 50% of equity assets under management (AUM) in the US, almost 25% of assets in Europe, and 15% within equity and listed property categories in South Africa. That leaves ample growth opportunity, as other regions around the world catch up to the US.
Williams added that ETFs are an efficient way to harness investment themes, which are being shaped by five megatrends that are dominating economies and financial markets globally. These trends will continue into 2030 and beyond, shaping the investment landscape and providing opportunities for investors to harness these structural shifts.
Five global megatrends shaping the investment world of tomorrow:
- Shifting economic power: The International Monetary Fund forecasts that China and India will generate about half of all global economic growth in 2023. Power is moving from West to East, and ETF products are evolving to offer exposure to the East, including the Satrix MSCI China ETF and Satrix MSCI India ETF. Further evidence of this economic shift is how the BRICS nations (Brazil, 1. Russia, India, China and South Africa), which represent the largest developing economies, have surpassed the G7 as the largest industrialised nations (US, UK, Germany, France, Japan, Italy and Canada) in terms of share of global GDP based on Purchasing Power Parity.
- Shifting demographics and ageing populations: In 1963, the fertility rate was 5.3 births per woman. By 2050, the UN forecasts this will fall to 2.1. Conversely, the global life expectancy in 1950 was 46.5 years; by 2050, this should be 77.3. Increased longevity and declining birth rates mean many countries have ageing populations, prompting seismic shifts to cater to older individuals. As populations age and technology enables further medical advances, this creates a virtuous circle as increased spending goes towards healthcare. Satrix launched the Satrix Healthcare Innovation ETF as a thematic strategy to enable investors to gain exposure to this megatrend within their portfolios.
- Technological innovation and breakthrough: A 2021 McKinsey paper suggests there will be more tech innovation in this decade than there was in the previous 100 years. Tech underpins multiple megatrends, and the Satrix Nasdaq 100 ETF is a great expression of capturing blue-chip game-changing companies in this space.
- Rapid urbanisation: The UN is expecting Africa’s population to double by 2050. People will migrate en masse to urban areas, creating mega cities worldwide. Satrix has Smart City Infrastructure and Global Infrastructure ETFs to address the titanic task of creating these cities, sustainably.
- Climate change and resource scarcity: By 2030, humans will need to have halved our greenhouse gas emissions to stop the most devastating effects of global warming from transpiring. We are running out of time, according to the Intergovernmental Panel on Climate Change. To help tackle this longstanding megatrend, Satrix has two ETFs which focus on climate transition while maximising exposure to highly rated ESG companies across the globe.
Trends shaping the South African ETF landscape of 2030
PwC predicts global ETF AUM will experience a 17% compound annual growth rate across the next five years. It pins this on recent record inflows, and a plethora of innovative new players and products. Williams expects robust growth locally, prompted primarily by institutional adoption and offshore interest.
He adds, “ETFs have been accessed primarily by the direct market locally. Now, we’re seeing adoption in intermediated spaces. In 2030, this trend is likely to continue, alongside offshore growth. As ETFs are traded more via Linked Investment Service Providers (LISPs) and other intermediated platforms, we’ll see increased activity that will naturally deepen the capital market process, lowering spreads and creating an ecosystem that attracts even more institutional players.
“Over the next decade, we’ll continue to see consolidation, with more refinement. Relative to income earned it’s costly to set up a low-margin business, so ETFs are likely to stay limited to the big players.”
Here, Williams gives further predictions for the local ETF landscape in 2030:
- Institutional adoption: There’s an upsurge in other African countries of institutional investors using ETFs to gain exposure in their portfolios. We’ll see this continue in South Africa as well.
- Swift uptake of interest-bearing asset classes: There's a rapid roll-out of new asset classes that historically haven’t been available in ETF form, such as bonds, commodities and even crypto. Now, globally, there’s a surge of flows going to interest-bearing asset classes. This means more market transparency when it comes to pricing, and further democratisation as these asset classes become increasingly accessible.
- Active management: Globally, in the fixed interest space, there's a proliferation of actively managed ETFs. For several consecutive quarters now, we’ve seen funds flow into this space worldwide. South Africa traditionally lags a little, but as uptake snowballs globally, we’re likely to see local adoption of actively managed ETFs as well.
- ESG: ETFs allow people to express their investment views and choose what they want to be exposed to. This includes ESG and sustainability-focused funds, like the Satrix MSCI World ESG and Satrix MSCI Emerging Markets ESG ETFs. Going into 2030, sustainable investment will remain a focus worldwide.
Traditionally, ETFs were synonymous with indexing and equity. Now, they’re being seen as a tool that benefits all players, across the asset class spectrum. There’s an increasing array of assets and investment strategies wrapped into the ETF vehicle, which makes them building blocks that give investors an almost infinite array of choices. This – plus their flexibility, low fees and dependability – is catapulting them into a new chapter of hyper-growth that’s likely to continue for the next decade and beyond.
*Satrix is a division of Sanlam Investment Management, an authorised financial services provider.
Satrix Investments (Pty) Ltd is an approved financial service provider in terms of the Financial Advisory and Intermediary Services Act, No 37 of 2002 (“FAIS”). The information above does not constitute financial advice in terms of FAIS. Consult your financial adviser before making an investment decision. While every effort has been made to ensure the reasonableness and accuracy of the information contained in this document (“the information”), the FSP, its shareholders, subsidiaries, clients, agents, officers and employees do not make any representations or warranties regarding the accuracy or suitability of the information and shall not be held responsible and disclaim all liability for any loss, liability and damage whatsoever suffered as a result of or which may be attributable, directly or indirectly, to any use of or reliance upon the information.
Satrix Managers (RF) (Pty) Ltd (Satrix) is a registered and approved Manager in Collective Investment Schemes in Securities. Collective investment schemes are generally medium- to long-term investments. With Unit Trusts and ETFs the investor essentially owns a “proportionate share” (in proportion to the participatory interest held in the fund) of the underlying investments held by the fund. With Unit Trusts, the investor holds participatory units issued by the fund while in the case of an ETF, the participatory interest, while issued by the fund, comprises a listed security traded on the stock exchange. ETFs are index tracking funds, registered as a Collective Investment and can be traded by any stockbroker on the stock exchange or via Investment Plans and online trading platforms. ETFs may incur additional costs due to being listed on the JSE. Past performance is not necessarily a guide to future performance and the value of investments / units may go up or down. A schedule of fees and charges, and maximum commissions are available on the Minimum Disclosure Document or upon request from the Manager. Collective investments are traded at ruling prices and can engage in borrowing and scrip lending. Should the respective portfolio engage in scrip lending, the utility percentage and related counterparties can be viewed on the ETF Minimum Disclosure Document.
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