Global megatrends shaping the ETFs of the future

Kingsley Williams

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:

1. 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, 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.
2. 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.
3. 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.
4. 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.
5. 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.