5. Passive News: A review of developments we have noticed over the last 12 months
The clients went in 2-by-2 ($billion), Hurrah! Hurrah!
Actively managed ETFs, a relatively new arm of the ETF universe, grew in popularity over 2020 – none more so than those managed by ARK Invest. The New York based group (albeit all working remotely) began the year with less than $3bn assets under management in five ETFs focused on leaders, enablers and beneficiaries of innovation.
After surging on average by 116% through 2020, by year-end, the group led by CEO Catherine Wood were managing over $50bn in assets, with around two-thirds held in their active ETF suite – a tenfold increase on the beginning of the year. Through December, their flagship fund, ARK Innovation ETF, was trading more shares daily than the majority of the US mega cap stocks, in no small part due to its considerable weighting in Tesla.
Leverage can be destructive
The exchange traded machine continued to crunch through funds, with a new record of 253 closures during 2020, way in excess of the 126 that closed in 2019. When trawling through the wreckage, we couldn’t help but notice the number of leveraged products in 2020 – a reminder of the destructive power leverage can be to the downside in periods of market stress. The VelocityShares 3x Long Crude Oil ETN (Exchange Traded Note) is an obvious example of a product that destroyed capital quickly, as the oil price plummeted in April.
Investors continued to favour ETFs with a conscience through 2020, as assets poured into products focusing on good environmental, social and governance practices. 31 dedicated socially-responsible ETFs were launched in the year, with Blackrock’s iShares ESG MSCI EM Leaders drawing in some $800m since launching in February.
In addition, funds dedicated to renewable energy topped the ETF league table with Invesco’s Solar ETF and WilderHill Clean Energy ETF delivering surely-not-sustainable returns of 223% and 196% respectively.
With much of the office-based workforce stuck at home for the majority of 2020, there was certainly a rich opportunity in stocks that could benefit from consumption and technology shift. ETF provider Direxion launched the world’s first workingfrom- home ETF in July, giving investors dedicated exposure to companies whose revenues are tied to the growth in cloud computing, cybersecurity and online connectivity. Companies such as Zoom (no doubt everybody took part in a family quiz) and Twilio (software behind cloud-based calling) feature in the top ten positions.
Blackrock iShares took this a stage further with their ‘Virtual Work and Life Multisector ETF’, which targets companies that empower not only working remotely, but support a virtual way of life across entertainment, wellness and learning. Whilst we don’t wish underperformance on any given fund range, we would certainly like to get back to more face-toface interactions at some point in the near future!
Even the central banks started buying passive funds
It wasn’t just the usual suspects who invested in passive funds in 2020, the Federal Reserve jumped in on the action too. During the market stresses of March 2020, the central bank pumped liquidity into the financial system by purchasing corporate bond ETFs. This action, coupled with the readiness to buy a substantial volume, was a critical turning point for market returns, by signalling to investors they would not allow corporate debt costs to continue to climb. This subsequently allowed a wave of company debt issuance and investors to finance companies in their time of need.
Whilst the Fed used iShares products to facilitate their programme, Blackrock only earned a fraction of their usual fees on the ETFs, agreeing fees of less than 2 basis points on the first $20bn.
A Renaissance for the post-IPO ETF
In last year’s edition, we covered the mini-boom and bust of the Renaissance IPO ETF – a product designed to track the performance of listings in the past two years. With the major market issuance in recent years coming from technology-based businesses, it was unsurprising theses fund outperformed the broader market. However, whilst the S&P 500 finished the year up 15%, the IPO ETF closed the year up a whopping 99.6% – a huge outperformance from companies that are new to the listed market.