In this episode, Douglas Yones, Head of Exchange Traded Products at the New York Stock Exchange, is joined by Shawn McNinch, the Managing Director of Brown Brothers Harriman’s US Relationship Excellence Group, to discuss the results of the 2023 BBH Global ETF Investor Survey and where opportunities can be found for the ETF asset management industry.

Douglas and Shawn discuss:

• Changes to the ETF survey results over the past 10 years
• The growth of Active ETFs
• Top surprises for ETF asset managers
• The changes for distribution for the ETF industry

TRANSCRIPT

Douglas Yones:

Hello and welcome to ETF Central, the podcast where we bring the latest and greatest ETF industry perspectives directly to you through in-depth conversations with key thought leaders from across the ETF ecosystem. I'm your host, Douglas Yones, the Head of Exchange Traded Products at the New York Stock Exchange, the Home of ETFs.

Now, today I'm joined by Shawn McNinch, the Managing Director of Brown Brothers Harriman's US Relationship Excellence Group. Shawn is responsible for executing BBH's overall go-to-market strategy for US asset managers, including responsibility for engagement initiatives with consultants and advisors. In this role, Shawn also has product oversight responsibilities for BBH's global ETF servicing business. He's also been a long-time friend of both the New York Stock Exchange and mine. Shawn, thank you so much for being here today.

Shawn McNinch:

Thanks, Doug. I really appreciate you having us here, and then always appreciate the partnership with New York Stock Exchange, and look forward to our discussion on our survey results here.

Douglas Yones:

Yes. Shawn, so you and I have known each other, boy, the better part of, I don't know, two decades. For those who might not know you, could you share a little bit about your background and where you spend most of your time these days?

Shawn McNinch:

Yeah, sure thing. So I started my career on a trading desk working at Merrill Lynch, and very soon after I started there I realized that trading wasn't for me. So I moved into management consulting, worked for Andersen Consulting, where I really built up a love for helping clients think about different problems and solutions. And then after I left Andersen Consulting, that's when I really started to look into ETFs. And I started to work for Investors Bank & Trust. And I was introduced to Barclays Global Investors, who was my first client at Investors Bank & Trust. And obviously Barclays had an ETF lineup called the iShares. And at that time they were only about 40 billion of assets. And I really got to see the growth of the iShares business while at IBT. And then fast-forward, Barclays Global Investors asked me to come work for them.

So I went over to iShares and worked in an ETF product strategy role where I was really working very closely with the index provider relationships, developing new indices that we could take and go launch new ETF products with. And part of that was negotiating the license agreements with the various index providers. So it was really a great learning experience and I really got to experience some of that growth of the iShares business. And then fast-forward even further, in 2009, I came over to Brown Brothers Harriman back to the asset servicing side. So I would say I have a pretty good perspective on both the asset servicing side of the business as well as the asset management side of the business. And here at Brown Brothers, I head up our global ETF servicing business as well as manage our US sales team here at Brown Brothers.

And I think your question about where I spend a lot of my time, a lot of my time is really focused around that client engagement, supporting new launches and new strategies, having strategic conversations with our ETF clients, helping them think through how they would cater a new operating model to support a new type of product. And then also, I work with a lot of new managers coming into the ETF space as well. And that's where my consulting comes into play in some of my experiences that I learned at Andersen of really thinking through and helping mutual fund managers coming into the ETF space for the first time. And how do we think about not only the operating model where Brown Brothers focuses on, but how do we help them think about more broader things like how you distribute ETFs and how that's different than maybe distribution of mutual funds?

How do you think about product strategy? How do you think about developing a capital markets discipline within your mutual fund complex where you're typically not used to that because now you have mutual funds that are trading on exchange? So that's kind of where I spend a lot of my time. And obviously there's a lot of time spent internally educating folks at Brown Brothers on the nuances of ETFs, whether that's senior management risk committees, so they can better understand how to incorporate risk and controls around supporting our ETF servicing business, as well as working with my system colleagues on building ETF solutions within our technology platform.

Douglas Yones:

And I think it's so interesting; we talk a lot about this on the podcast, how people ended up in certain roles, and you make a really interesting point, Shawn, for let's just call it the younger crowd listening in, which is just sometimes figuring out what you don't love to do can actually help you find what you do love to do. And I love that story of starting in one place just and finding, "Hey, this isn't right for me," but sort of managing that to the next step and taking on new ideas that bring you to new places. Could you talk a little bit for those that maybe aren't as familiar with Brown Brothers Harriman, right? I mean you think about BBH and some of the things you talked about where you're spending your time. I mean, these are not the typical bank custody functions. I mean, you're talking about a lot of different pieces. How does BBH and some of that work fit into the broader ETF ecosystem?

Shawn McNinch:

Yeah, sure. I always say we do a lot of the work that asset managers don't want to do, and it's maybe not part of their core competency. Typically asset managers will look to outsource certain operations to us because they want to focus on their core competencies, which is really managing the money and the portfolio management side of the asset management business. So we do the custody, we're a custodian bank. We do a lot of the funding counting. Within the funding counting world, we're also developing baskets, and PCFs, which are obviously unique for the ETF market. And we do a lot of the fund administration as well as middle office and transfer agency. We're really geared towards the authorized participants in helping them come in and out of the ETF in the primary market.

In addition to that, we do a lot of work in our markets business with securities lending and supporting foreign exchange with our ETF clients, as well as provide a lot of data solutions through our intermediary suite of products. But I always kind of joke, it's really a lot of the work that asset managers don't want to do, they kind of outsource to us, and we effectively become a big part of their back office and operations in support of their ETF business.

Douglas Yones:

Yeah. And I think it's just amazing how this industry has transformed. When you and I first started working together, it was very much a here are processes we can help each other with. And now as you mentioned, you're doing so much in the world of consulting, here are the things we can help you build. Here are the ways that we can step in and make your business better. Along those lines, so BBH, you've been doing this ETF investor survey for some time. The latest edition just dropped, I mean literally just dropped. And here we are. This is actually the 10-year anniversary of the BBH ETF Investor Survey. Where did this all start and what does this provide? Why keep doing it? What is this providing for the ETF industry?

Shawn McNinch:

Yeah, I think it all started with, as we engage with our clients, we have something that we call insight-led engagement. And so we're always looking for ways to bring insights to our clients that are going to be really valuable to our client's business. And it's not really about our business, but more so how do we bring insights that are going to be additive to our client's business? The ETF survey is the perfect example of that. So that we can go out, we can pull different investors and then bring some of that results back to our clients. I call it an engagement tool. It's something that we can work with our clients and we go out to our clients prior to the construction of the survey questions and we pull them and say, "Hey, are there certain questions you think would be fine interesting in the next ETF Investor Survey?" And so it's a way to engage with our clients to get their input into what questions they would find most interesting and most valuable to get some insights on.

And then after we execute the survey, we work with a market research firm to go out, and we poll different investors in the US market, Europe and Asia. And then after we get the survey results, we spend a lot of time dissecting those results and slicing, and dicing the data in different ways. But the whole premise of why we do it is so that we can kind of share it with our ETF clients and obviously the broader ETF market. And so they can use this as an independent source of information to either confirm or maybe disprove their hypothesis on new product ideas or new distribution strategies that they may find useful. We also have seen a number of mutual fund managers use the survey results to support business cases. Should we get in the ETF space or should we not? And how can they use the ETF Investor Survey as a way of using the data in it to support a particular strategy they may be going into as it relates to the ETF market?

Douglas Yones:

So the survey just dropped, right? We've got all the results. I know I've been going through it. Are there items in that survey you looked at and said, "Boy, boy, these are pretty big surprises"?

Shawn McNinch:

Yeah, I think there are some surprises, but let me first talk a little bit about the evolution of the survey over the last 10 years. I think what you've seen this year is that the ETF toolbox continues to expand. There are more and more types of asset classes that are used in the ETF wrapper in order to create new products. And investors are continuing to embrace the ETFs as really the vehicle of choice for them with merging categories of more and more demand for active ETFs as well as fixed income, really starting to get some traction in that space. So I think an overall premise when you look at the survey results is that ETFs have really evolved. It's starting to mature, and there are more and more ways that investors are using ETFs at a high level.

If you look at some of the surprises of the survey, one of the things that really kind of jumped out at me was the demand for crypto and digital assets. It still remains pretty strong based on the survey results. Nearly half of the investors plan to add cryptocurrency and digital asset type products, ETFs into their portfolios this coming year. And I think that that seems pretty high just given the volatility around the digital asset space. But I still think investors look at it as a new asset class, an asset class that is providing additional diversification into their portfolio. But it's not for all investors, it's not for the faint of heart. If you look at the Bitcoin spot price at the end of December, that was trading at around $15,000. It's now at $30,000 over the last three and a half months. If there's some major volatility in this asset class, it doesn't mean that investors aren't willing to diversify and get some exposure to this as a way to create additional returns.

Douglas Yones:

Yeah. I think there were so many different pieces in there that I looked at, and of course I look at it every year and we'll get into the crypto because I want to come back to that. But just some of the different themes that came up the way in which investors are now adopting ETFs into their portfolios seemingly just continues to change year over year the way they want to be contacted. And we'll get into that as well. They're just, to me, and I felt like this year, as someone who sort of lives and breathes ETFs, I'm not always shocked. I'm always sort of positively impressed. Okay, more investor adoption, more usage. This year, I felt like there were a lot of different places where there's just more to talk about and where people really should dig in there.

One of those spots, Shawn, I want to talk to you about is around active ETFs, right? I mean, here at the New York Stock Exchange, we produce our active newsletter that comes out every other week. It's free for anyone who doesn't capture that, let us know. You can also find it on our website, homeofetfs.com, and you can subscribe there. But we've been tracking the growth of active here as probably the home of active ETFs for some time. Given the entry point of firms like Dimensional Capital Group, what's going on with J.P. Morgan, are you surprised at all by the category responses around active ETFs in your survey?

Shawn McNinch:

I don't think I'm too surprised by it because we've been hearing about demand for active ETFs or even  dating back as far as our first survey 10 years ago. I think what we're seeing now is the survey results are translating into what we're seeing in the market. So the survey, we asked a question, did you buy an active ETF last year? And 92% of those investors said they bought an active ETF in the last 12 months. And based on the survey results, 40% of the investors plan to increase their allocation to active ETFs. And so that's very consistent what we've seen in prior years. But if you look at what's happening in the market, I think what investors were seeing is that they're taking action on that. Active ETFs now account for about roughly about 5% of the global ETF assets under management, and we're seeing a lot of positive net flows.

Active ETFs last year captured about 14% of the total net ETF flows, taking in over 120 billion of assets. And it's growing at a 10% compounded an annual growth rate over the last couple of years. But I think what we're also seeing is just the pure number of ETFs, active ETFs coming into the market. So year over year in 2022, that number has increased by 30%. So more and more mutual fund managers, managers that we've had a lot of conversations with, probably you and I both combined, they're actually coming into this space now. Five years ago, 10 years ago, they said, "Hey, we're never going to launch an ETF." That mindset has completely changed where these active mutual fund managers are saying we need to have an ETF to be competitive because our investors are really demanding it.

Shawn McNinch:

And so that's very consistent with what we're seeing with our clients. We had a record year of supporting our clients' launches. We launched about 120 plus ETFs last year, and about a quarter of those were active ETFs. And I think you're going to continue to see growth in that space, and especially with the mutual fund ETF conversions that we've seen with J.P. Morgan and Dimensional. We've supported the first conversion of mutual funding to ETF in the US market, and since then we've supported an additional three and we probably have six to eight in the pipeline. So I think that could also springboard and expedite some of the growth that we're seeing in the market as well.

Another interesting thing on the active ETFs, we asked the question to the investors, what's your main concern when investing in an active ETF? The number one concern was around performance. And that has overtaken, from prior years, trading volume. And I think that is really a testament to the exchanges and the education the exchanges do, but also on how market makers are trading these active ETFs and making tight spreads so that investors feel comfortable that that's not a major concern anymore. And they're using more traditional screeners than they typically would with an active product like performance as a way to assess different active ETFs, which I think is always, it's a positive sign.

Douglas Yones:

Yeah, for sure. And I mean, just some of the stats as you said are, I mean, geez, here at the New York Stock Exchange, the last three, four years now, more active ETFs are launching every year than index ETFs. And that trend is growing, not shrinking. There are now 218 different issuers of ETFs that are all running actively managed ETFs. This year alone, eight brand new asset managers have come into the space that never had an ETF before. They now run ETFs that are actively managed. So the growth continues to be there. And one of the thing I find our team has a lot of conversations about is the semi-transparent active ETFs. I mean, the New York Stock Exchange, of course, we offer a solution. You've got the other solutions out there available from Presidian, Fidelity has a solution. Invesco's running its own solution, T. Rowe Price.

I mean, we're running 16 different ETFs now under the NYSE solution, $2.8 billion in assets under management. They don't show their holdings every day. So that's bringing a lot of active managers that maybe were hesitant before to be able to come into the space and say, "Hey, I can actually hide my holdings daily." The other spot though, Shawn, you mentioned crypto, you mentioned some of the non-correlated assets, right? Commodities came up in your survey. ESG came up in your survey. Why do you think that that's the case and why is it happening now?

Shawn McNinch:

Well, I think it's just the evolution of the ETF products. So ETFs have moved away from just being a passive vehicle, just being equity based. And now investors are looking for ways to diversify their portfolio, looking for non-correlated assets to kind of move away from just pure equity exposure. And so in periods of volatility, I think there's a 10 from investors to kind of look for safety. And so there'll be more increase in demand for commodity type products. So I think that's something that we saw in our survey is that 69% of our global investors plan to maintain or increase their allocation to commodity ETFs. Another area of growth where there seems to be a sizable amount of demand is that three quarters investors are planning to maintain or increase their allocation to buffer or market mutual strategies, which really is intended to have some downside protection there.

So I think with volatility in the marketplace, investors are looking for ETFs that provide some safety in that space. If you talk about ESG as well, I think that has been a major area of growth in particular in Europe. If you look at the global ESG ETF market, there seems to be very high demand based on the investor survey, and there's sizable growth in that space. Over the last five years, that market has grown by 40%. And up and through last year, there were 43 consecutive months of inflows. So that's really a sizable market. From a survey perspective, 50% of the respondents plan to add additional ESG exposure this year, and that's really led by the European ETF market. So last year, 65% of all inflows in 2022 were within ESG ETFs within the European ETF market.

And that totals now as close to about 20% of the European ETF market is made up of ESG ETF. So while that's very sizable, I think in the US there's still a lot of demand for it. I think in the first quarter there's been a little bit of a pullback on the ESG ETFs, concerns around greenwashing and how we're classifying ESG products. There's been some reclassification by index providers and even some institutional investors have divested out of some of the ESG products. But I think the long-term outlook for E G ETFs, there's still a lot of demand in that space, and we'll continue to see that grow across the globe.

Douglas Yones:

Yeah. And of course, we continue to see that happening even here in the US with DWS. I think they just broke the record for the largest ETF launch on the first day, close to 2 billion in assets, and I believe that was an ESG fund. So we're still seeing the growth even with some of the conversations in the market. Also, in case it isn't clear, I know you raised this, but I want to point it out again, Shawn. In the BBH investor survey that you just published, you actually break down responses from the US, you break them down for Europe, and you break them down for Greater China. So for those that are out there thinking about the broader markets, or you're coming in and listening from another market, this is not a US-centric survey. We cover BBH. I say we, Shawn. You cover the whole world with this survey.

I want to talk to you though about fixed income. I feel like this shouldn't have been a surprise, yet every time I talk to someone who's read the initial results, they're like, "Wow, look at what's going on in fixed income. Look what's happening with fixed income ETFs." I know within the ICE organization, that team that basically licenses fixed income indexes has been busier than they've ever been. Fixed income in the world of ETFs is just seemingly growing by leaps and bounds. Do you look at that and say, "Hey, this is sort of like the next greenfield space for growth in our industry"?

Shawn McNinch:

I definitely do, and I think it has to do with the shelf space with an ETF, right? And I think a lot of the equity, there's a lot of products out there in the equity space, and if you look at that comparison to the fixed income space, not so many products in there. So I think as more and more investors are looking at how do I get exposure to fixed income in the ETF wrapper, this area is ripe for growth. When I look at the survey results 10 years ago when we asked the question, are you planning on increasing your allocation to fixed income ETFs? Only 12% of the investors said they were. Fast-forward to this year's survey, that number has grown to 55%. So there's definitely increase in demand on the investor side to be able to get access to fixed income and bonds through the ETF wrapper, which is a very easy way to do so.

And you just can see the flows into this space. Last year, global fixed income ETFs have over 250 billion of net inflows in 2022. And I think more and more managers, more and more investors are looking at fixed income ETFs as a way to get into the bond space. We're seeing a lot of flows going into short duration products. And there's probably a little bit more flows going into, I would say the higher rated government bonds moving outside of the corporate bonds perspectives. So I think a lot of ETF sponsors and asset managers are looking at, how do I capitalize on these flows and get in here because the market is still, it's not as mature as the equity market on the ETF side.

Douglas Yones:

Yeah, I mean, just even from my seat, I can tell you there's so much opportunity in the world of fixed income, so many places that just haven't been covered yet. So if you're out there and you're looking at the next big wave and you want to get involved, please call me, call my team, call Shawn. We're happy to engage with you. So I want to talk, I gave it a teaser in the beginning, Shawn, but I want to talk about one of the items that popped to me that I was just taken aback with, and I have my team now focusing a lot of brain energy on this.

I'm looking at the survey right now. Investors prefer virtual to in-person meetings. 62% of investors prefer to engage digitally with sponsors, and 53% prefer having digital content and insights pushed to them. I mean, geez, great news for the New York Stock Exchange, because we're in the business of media education. We launched a whole website called ETF Central. It's free, if you haven't been there yet, please visit ETF Central. It's a free location. We're running ETF University, we're building education for ETF industry participants, whether it's advisors, investors, et cetera. But I mean, wow, does this sort of mean the way we think about ETFs and how they're marketed and sold? Does this change things?

Shawn McNinch:

I think it does to some extent. And I don't want to minimize the importance of face-to-face meetings and building relationships because there's a lot of that that requires the face-to-face meetings, and it's the meeting after the meeting sometimes that really moves the needle. But I do think Zoom is here to stay, and it's going to be a major factor within distribution teams. And just think about how much time is wasted within distribution teams on getting to the airport, sitting on an airplane and traveling to see an advisor in the middle of the Midwest or something like that.

And so I think distributors can now be a little bit more efficient with their time. They can have a lot more meetings, spend less time in airports. I think over overall time will tell, is that enough to move the needle? And will they continue to gather flows through that medium? And you're playing quality versus quantity of discussions with those advisors. And can you still have quality conversations in a Zoom environment? And I would say you probably can, but it's not to minimize the importance of building relationships in a face-to-face meeting. So I think you'll probably see a little bit of a hybrid here as distribution teams trying to figure out what is life like after COVID and try to figure out how to maximize the use of Zoom and other sessions.

Douglas Yones:

So now I'm going to ask you to look a little bit into your crystal ball. So you've got this really good copy. You've got connections across the global ETF industry where you're asking a lot of questions, including open-ended questions. I know a lot of that might not be as published, but your team certainly engaged there. If you were going to look into the future a little bit, Shawn, do you have any kind of key predictions where you think we're headed, ways to get to, I don't know, get involved in the opportunities in the world of ETFs?

Shawn McNinch:

Yeah, sure. I think what is obvious to me, and probably to you, because you live in the ETF space, is that ETFs have now surpassed the mutual fund as the structure of choice. And as you look at firms that are coming out with new products, nine times out of 10, it's an ETF versus a mutual fund. And I think, you look at the flows that are going into ETFs. We're seeing net positive flows going into ETF, net negative flows going out of mutual funds. And a lot of those flows that are coming out of mutual funds are going right back into the ETF. And so I think we made a pretty bold prediction in this 10th annual Global Investor Survey. We believe that within the next 10 years, ETFs can go over 30 trillion. And that really represents a 14% growth rate. And if you look at the last 10 years, ETF grew at about just under 17%.

And I think just with the structural benefits of the ETF with the tax efficiency, the low cost nature, and the SEC making it easier for managers to launch ETFs through the ETF rule, more and more managers looking to potentially convert mutual fund assets into ETFs, I think that number is very realistic that that can happen. There still needs to be a lot of work to be done in the marketplace. From an education perspective, I think we've done a lot of great education in the market. I think we've kind of completed the ETF 101s, now it's kind of getting into the ETF 201s and 202s sessions with the marketplace to really take that growth to the next level. I also think active ETFs are going to be a major factor. They're just over 500 billion now. I would think that within three years that those assets will double and maybe even earlier to hit that trillion AUM number.

Douglas Yones:

Yeah, I mean, we couldn't be more bullish here at the New York Stock Exchange in terms of growth rates. And frankly, the opportunities that are out there for those who are thinking about launching ETFs, those who have already launched ETFs, those that want to grow their business, taking your US business globally, we've got relationships all around the world, whether it be through Europe or Latin America into Asia. So again, if you're out there and you're thinking about getting involved or you want to get more involved, please reach out to me. Please reach out to my team. Also, probably important for those listening in, we're doing a short version of this right now, but we are going to do a long form version. We've got a webinar scheduled. It's Tuesday, April 25th. We are broadcasting live from the New York Stock Exchange, at 2:00 PM. It'll be a visual webinar for those that'd like to listen in.

And we are going to take questions live. Shawn will be on stage. We've also invited J.P. Morgan to be a part of the conversation and as they continue to grow their ETF lineup. And we're going to really dig deep into the ETF industry. We're going to debate some of the results that we've seen out of this BBH survey. We're also going to talk about some of the growth and development of the ETF industry. You can find all the details either on our social media feeds, find any of us, or again, through New York Stock Exchange, homeofets.com. Shawn, for those that haven't maybe received the survey directly, they didn't get it copied straight to their email, where do they go? How do they go get the full survey results?

Shawn McNinch:

Yeah, the survey is located on the homepage at bbh.com. So just go there, it's bbh.com, and you can download a copy of the survey, but also be happy to sit down and discuss the results with anyone that wants to get into a little bit more details about the survey results. And we have a lot of data. So even though you see the survey report that our marketing team helps produce, there's different versions of that data, how we can slice and dice the data. So feel free to reach out to me and happy to share the results and the data behind the results.

Douglas Yones:

Yeah. And again, think global when you do that because your team has results from all around the world, including the Greater China area, which I think is really impressive. For asset managers that are out there, Shawn, they haven't launched an ETF may be yet. Maybe they're just running SMAs, they're running mutual funds. How do they reach you? How do they get engaged with you and your team?

Shawn McNinch:

Yeah, so I mean, we have a lot of experience launching ETF. So we've now launched with over 70 different ETF sponsors. And so we've been in this space for 20 plus years. And I think the great thing about my job is I get to work with a lot of asset managers and help them think through their ETF strategy, help them introduce them to the ETF ecosystem like Doug at the New York Stock Exchange. But because we work with so many different ETF clients, we sit in a really good seat to see the overall trends that our clients are doing and how they're solutioning for different problems and how they're innovating with new products. So typically, if we don't have the answers to your questions, we have a good enough relationship with the ETF ecosystem to go get your answers. So happy to engage with you as you are looking at your ETF product lineup or thinking about coming into the ETF space and figure out ways to kind of help you with that.

Douglas Yones:

Yeah, I think that's perfect. And again, you can find Shawn easily on social media, just look him up, Shawn McNinch. If you can't find him, you can always contact me or email my team, etf@nyse.com and we'll get you right in touch with the BBH group. Now, that is a wrap on this edition of ETF Central The Podcast. As a reminder, you can find this episode as well as many other episodes. Oh, and by the way, you can spend time utilizing the free ETF screener. That's right, I said free, on the website, etfcentral.com. Just go to etfcentral.com. Go right now. Hit the screener bar.

You can type in anything you want to find an ETF. It's intuitive. All you have to know is roughly what you're looking for, and you'll find every ETF that covers it with all the data there too. You can also explore ETF University. We talked a little bit about this. This is the place for educated investors to increase their knowledge when it comes to investing and ETFs. I want to thank you again, Shawn, for being here to share your insights. Stay tuned for upcoming episodes featuring thought leaders from across the ETF ecosystem. I'm Douglas Yones, Head of Exchange Traded Funds at the New York Stock Exchange, the Home of ETFs.