The three big trends for ETF markets in 2023

ETFs have flourished in recent years. They can tap into niche investor interests, such as robotics. They are easy to use and accessible. They can be a cost-effective product depending on the structure too. Unsurprisingly, PwC predicts that global assets under management could reach $US20 trillion by 2026. No small change. 

It's also been a big few years domestically for the ETF market, with the AUM practically doubling between 2019 and today. Our market seems to be catching up with the trends of the more mature US and European ETF markets.

In the past few years, some of the trends that have dominated ETF flows and launches have been tech-sector and thematic ETFs and the emergence of active ETFs (after ASIC put a six-month hold on these in 2019). 

So what should investors expect in 2023? 

It's fair to say ETFs are closely tracking the broader investment market trends in the big focus areas for the coming year.

Green is the new black

Investors are increasingly focused on sustainability, the environment, and governance. In fact, a recent survey from Investment Trends and Australian Ethical found that 46% of investors were consciously considering ESG investments. 

"The green wave swept Europe, the Middle East and Africa first and we expect to see a greater focus in Australia in the coming year, in line with greater attention from regulators and the new government in Canberra," says Kathleen Gallagher, Head of SPDR ETFs at StateStreet Global.

Let's just say issuers have well and truly gotten the memo.

A few years ago, there were only a handful ETFs touching on green themes listed on the ASX. Since then, we've seen many launches. Some examples from the past few weeks alone include:

• Global X ETFs Green Metals Miners ETF (ASX: GMTL)
• BetaShares Energy Transition Metals ETF (ASX: XMET)
• SPDR S&P World ex Australia Carbon Control Fund (ASX: WXOZ)

This trend is set to continue. PwC's report ETFs 2026: the next leap found that 45% of ETF issuers expect 50% of their new launches to be ESG-focused. 

Kanish Chugh, Head of Distribution at Global X ETFs, believes that the next big growth area for ETFs will be in carbon credit trading. Products focused on this area are already starting to appear on the ASX. Investors may not have recognised the full potential yet but the coming years should start to fuel a change in interest.

He points to the annual EU carbon credit auctions for heavy emitters as a key opportunity.

"Each year, the number of credits up for grabs is reduced - effectively driving up the cost of carbon emissions. Previously, investors could not access the carbon credit market so the introduction of ETFs which track carbon credit futures has opened a new avenue of ESG investing. Carbon credits also act as a unique asset class diversifier," he says.

Growing interest in fixed-income ETFs

In keeping with the broader market, investors are returning to fixed income. Approximately 16% of the ETPs listed on the ASX are focused on fixed income. 

Cameron Gleeson, Senior Investment Specialist at BetaShares has noticed strong flows into the fixed-income products BetaShares offers.

"As containing inflation remains front of mind for central bankers around the world, their moves to increase rates have seen investors take stronger interest in strategies in fixed income over the last few weeks," he says.

There's no sign that an end to rate hikes is in view, so investors are highly likely to continue this approach into 2023.

Gallagher suggests this could also be a target area for innovation.

"The first big mover could be the creation of more fixed income ETFs, with the global bond market valued at US$130 trillion in 2021, as investors search for yield," she says.

Gallagher expects investors to focus on high yield and high quality in their approach to fixed income ETFs - though she points out, in difficult markets, this will also be a focus on selection for equity ETFs.

Tech thematics will continue their run

The bulk of flows typically heads towards broad-based indices, with Australian investors showing a hometown bias for those focused on the ASX200. It may come as a surprise after the year that the tech sector has had, that anything in this space could be a trend for 2023. However, cybersecurity and robotics will remain dominant players (and potentially earners for the coming year).

Those investors hit by Optus and Medibank in recent weeks may appreciate these trends better than anyone. Companies will be investing in this space in a big way in coming years - Medibank and Optus have only highlighted how crucial this area is. In a tough environment, cybersecurity may actually be recession-proof. You can read more in this article:

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Robotics flies a bit more under the radar. It's part of a structural change and worth keeping an eye on.

The COVID-19 pandemic was a timely reminder of just how easy it is to disrupt supply chains when you need to rely on a human workforce. Many companies had already started considering using more advanced robotics as part of automated warehouse solutions, manufacturing and production. That's before we look at robotics in sectors like healthcare.

"We have on the one hand a real boom in consumer demand, especially in the US. And on the other hand, we have some supply bottlenecks. Both are good for automation businesses," says Chugh.

Companies like Ocado (LON: OCDO) have been prominent in this space for warehousing solutions, while Amazon's (NASDAQ: AMZN) drones are now a well-known feature internationally. It's a trend anticipated to continue. 

Both cybersecurity and robotics are highly diverse spaces, with many companies domiciled in the US. We'll also see winners and losers in the coming year. Some smaller businesses will accelerate, others will fall. This is why Chugh believes investors will look to the ETF space instead for diversified global exposure.

The ever-changing world of ETFs - onward and upward

The ETF market is no stranger to change and innovation. While the above might be dominant investment themes that should influence product flows in 2023, anything can and will happen. Who knows what that will mean for the next phases of innovation and product issuance in the ETF space? In the meantime, it's good news for investors. The space continues to grow in 2023 and beyond. Chances are, if you want a specific investment focus, you'll find an ETF to match. 

Have I missed a theme for ETFs in 2023?

Let me know your thoughts in the comments below - or which ETFs you already back in the themes above.

This is the final wire in a three-part series on ETFs featuring Kathleen Gallagher, Cameron Gleeson, and Kanish Chugh. You can read the previous wires below.

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