Megatrends and The Future of ETFs
Megatrends are powerful geostrategic forces that will transform the world and bring profound changes to the way we live. The concept of megatrends is not new. Just think of how the internet has evolved and impact our lives – something that was inconceivable half a century ago.
Just what are the mega forces in action? How would these megatrends reshape the world as we know it? How will the world look like by 2030?
The 9 Megatrends Underway
Recognising the shift in priorities of societies is key to positioning portfolios for the long-term.
In 2019, the Massachusetts Institute of Technology published a list of the biggest megatrends that will impact the world by 2030. Here are the nine global trends in the horizon:
|Global population will grow to 8.5 billion, with more than 1 billion to be over 65. Due to better healthcare services, life expectancy will also be higher.|
|Two-thirds of the world will live in cities. There will be a need for better management technologies for buildings and expansion of urban agriculture.|
|A radically more open world as amount of information collected on people, products and organisations grow exponentially. Tools to analyse these information will also become well-developed.|
|Inertia from governments to balance economics and environmental needs. Climate may feature regular, extreme temperature everywhere.|
|Resource constraints will force higher usage of recycled content and remanufactured products. Water will become a stressed resource.|
|Drop in cost of clean tech will drive growth in renewable energy. Electric vehicles will become mainstream. Data-driven tech will drive efficiency for infrastructures.|
|Dawn of affordable AI with human levels of intelligence. Potential to create new jobs but also would disrupt or even displace entire segments of work.|
|Climate change, resources pressures, vast inequality and poverty require global governments to come up with unified responses which is high unlikely. Businesses may end up driving sustainability.|
|Rise of nationalism and radicalism.|
In essence, this list of the megatrends represents longer term structural shifts in the way society functions and can alter the trajectory of the global economy. Their developments will bring consequential (and often irreversible) impacts for the world around us. They influence government policies to businesses and inevitably, the investment landscape.
Future of ETFs
Globally, ETFs surpassed US$6 trillion in assets under management in 2019. The tailwinds for ETFs would likely continue as the core proposition of low cost, transparent and easy-to-trade features remain. investors looking to diversify their portfolios without spending time and effort to manage their assets will continue to see ETFs as attractive investment options.
That said, the growth of ETFs will likely not be evenly distributed as investors, with differing priorities, pile on different investment themes. After a conversation with Morningstar, these are some predictions about the future of ETFs that stand out.
- Income-focused ETFs Will Continue to Gain Popularity
The world’s population is ageing and more than 1 billion people is expected to be over 65 years old by 2030. According to United Nations: World Population Prospects 2019, the world’s population life expectancy also continues to extend from 72.6 years in 2019 to 77.1 years by 2050.
The shift in demographics will be a key fundamental driver for demand for income-focused ETFs, as more investors seek for income, for a longer period of time due to increase in longevity. In general, this also could mean that slower working age population growth would lead to slower output growth and hence, undermine expected nominal returns in the future.
In addition, the world economy is also becoming acclimated to the lower interest rate environment. Given this backdrop, the aging society will continue to drive demand for yield-oriented assets.
Some of such products are offered by Phillip Capital Management including Phillip SING Income ETF, Phillip SGX APAC Dividend Leaders REIT ETF, Phillip Singapore Real Estate Income Fund and Phillip Money Market Funds.
- The Advent of ESG ETFs
It is an outdated view that businesses have to sacrifice some financial return when they adhere to socially responsible investing principles. A study conducted by Harvard Business School, found that performance of companies that voluntarily adopted sustainability policies in their processes in the early 1990s, significantly outperformed counterparts over the long-term.
Expanding focus in ethics/environmental, social and governance (ESG) in recent years has driven investors to align opportunities with their values and beliefs. Due to the transparency of ETFs by nature, investors can monitor evidence of ESG focus and hence why an ETF is a vehicle of choice for ESG-investing.
Many factors continue to support the trend for ESG investing. For one, we are already seeing a growing push of the sustainability agenda by the Millennials and Generation Z in major economies like in the US, EU and China. The movement to address sustainability is also growing in prominence: Just last year, Greta Thunberg, a 16-year old Swedish school girl and climate activist, was named Time magazine’s Person of the Year.
Locally, investors should also be cognisant that our Singapore banks have ended new lending to coal projects. This major development was quite widely covered by news media in 2019.
Going forward, ESG ETFs will likely incorporate more and more clean technology companies that address different environmental challenges in portfolios. This could include water treatment plants, renewable energy producers, recycled content producers or electrical modes of transport vehicles.
- Intersection of Impact Investing and Exponential-Technology ETFs
Technology has permeated through every aspect of daily lives and innovations will still be the keys to creating viable and sustainable solutions to address society’s most urgent challenges. The Millennials and Generation Z can fully appreciate this aspect. The prospects of pairing ESG values with disruptive technology as a value propositions of ETFs will become increasingly appealing.
Exponential technologies are defined as innovations that have the potential to positively affect billions of lives. Some examples are robotics, artificial intelligence (AI), medical technologies, autonomous vehicles. Different technologies can also be “fused” to address more complex issues, for instance how radio frequency components combined with phones gave the world smartphones.
- Alternative ETFs To Be The Next Frontier For Retail Investors
As retail investors grow more sophisticated, they will increasingly desire to dip into private equity markets. However, most retail investors do not meet regulatory requirements to buy into such markets.
Due to how ETFs have democratised investing, they are natural vehicles to gain exposure to alternative strategies. Apart from private equities, alternative ETFs can also include commodities, real estate assets, family offices etc.
- Growing Adoption of Smart Beta ETFs
The recent coronavirus outbreak is putting Smart Beta strategies back to the spotlight. Within the landscape, multi-factor approaches that are tilted to quality or risk-control give investors stronger protection in downturns.
With markets questioning the longevity of the current bull market, we are likely to see more and more investors are embracing non-traditional ETF strategies to help them participate in in potential upside while minimising downside risks.
Just An Impressionistic Picture
No one can predict how exactly the future will turn out. The predictions mentioned in the article can – at best – only paint us an impressionistic picture of the world of the future. The key takeaway question though is, how are you positioning for it?
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