Continued inflows into fixed income trackers, a growing appetite for ESG strategies and the popularity of factor-based investing are likely to be the three main themes in the exchange-traded fund space in 2020, according to Franklin Templeton’s Jason Xavier.
Xavier (pictured), head of EMEA ETF capital markets at Franklin Templeton, said the continued appetite for exchange-traded fund (ETF) products was strong last year and is showing few signs of slowing down.
“The tailwind for ETFs going into not only a new year but a new decade couldn’t be stronger,” he said. “Last year, global ETF assets under management surpassed $6trn, and in Europe, we broke $1trn.” 
Below, Xavier highlights three key trends that he believes are likely to dominate the ETF space this year.
Flows to continue to fixed income
Firstly, Xavier believes that fixed income strategies will continue to attract inflows during 2020 despite growing concerns about the potential impact of the size of the space in markets.
Source: Lyxor ETF
The ETF specialist said fixed income ETFs saw inflows of $250bn globally last year, pushing assets under management to almost $1.2trn.
“Investors continue to embrace the ETF wrapper for fixed income allocation across all client segments for the transparency, liquidity and price discovery that typically make it a true value-add,” he said.
“The democratisation of price discovery that ETFs have brought to the fixed income investing landscape continues to be very well received by clients.
“We see more and more of them adopting the use of fixed income ETFs in their portfolio construction.”
Appetite for fixed income strategies is likely to be fuelled by investor concerns around global growth in the face of numerous macroeconomic and geopolitical headwinds. Xavier noted that credit markets have been the main beneficiary of periods of weakness in global equity markets in the past and that rotation could continue in 2020.
Active fixed income strategies are likely to see greater interest from European investors, particularly against a backdrop of negative rates and greater uncertainty.
“A focus on earning some cash in Europe will likely continue to dominate actively managed fixed income ETFs as investors position for shorter durations and continue to utilise the intraday liquidity benefits,” he added.
ESG to become fastest growing segment
Interest in ESG (environmental, social & governance) issues has grown significantly in recent years, sparked by a greater awareness of climate change issues and a widening wealth gap.
As such, Xavier believes that ESG-focused ETF strategies will be the fastest-growing segment and could dominate issuance in Europe during 2020.
“Last year, ESG-focused ETF assets under management grew by $16bn in Europe, a 150 per cent increase, to $33bn from approximately $12bn at the end of 2018,” he said.
Source: Lyxor ETF
Growth in assets has been supported by a number of different structural trends too, such as the treatment of climate change as a systemic risk.
Meanwhile, wealth transfer to a younger generation is prompting a change in investment patterns.
“Both ‘millennials’ and ‘Generation Z’ that follows have grown up with and are dependent on technology, and hence an active audience for investing in and tracking ETFs via mobile devices,” said Xavier.
“I strongly believe there’s likely to be solid support for increased ESG-focused ETF issuance, particularly because various studies have cited values-based investing as a priority among Millennial investors.”
Factor investing and factor ETF strategies are here to stay
Despite increasing levels of interest in ESG and continued inflows to fixed income strategies, factor-based and smart beta strategies have dominated flows over the past decade.
“While the ongoing low-yielding global economic backdrop has clearly been very supportive of market capitalisation-based strategies, more and more investors are embracing strategies to protect themselves against an economic downturn,” said Xavier.
“Within the smart beta landscape, strategies that incorporate a multi-factor approach tilted to quality or risk-control strategies dominated flows last year.”
Source: Lyxor ETF
Flows to factor-based strategies are likely to be fuelled by ongoing investor concerns given the lack of clarity surrounding global growth and the sustainability of the US market bull run.
“Consumer spending and a strong labour market continue to point to an upward trajectory,” he said.
“However, it’s clear more and more investors are embracing non-traditional ETF strategies to help them participate in potential upside while aiming to minimise any drawdowns.”