A Modern Prime Broker for the New World of ETFs

2023 has seen a number of shocks to global financial markets, from bank bailouts to the prolonged effects of a heightened interest rate environment. Historically, investors have turned to ETFs to allocate capital and manage risk during periods of market stress — and this time is no different.

Last year, asset managers launched 430 new ETFs amid the poor performance of stock and bond markets. (i) U.S. ETF trading volume reached nearly 40%, compared to an average of 32% in 2022. Increased interest rate volatility is spurring outsized trading in U.S. Treasury ETFs, which traded nearly 13% more than their 2022 averages in Q1 2023, a quarterly record. (ii)

Recent growth in ETF volumes can also be attributed to an increase in ETF conversions. Since March of 2021, 33 mutual funds, with almost $60 billion in AUM, converted themselves into ETFs. (iii) This may seem like a drop in the bucket of the $7 trillion-dollar U.S.-based ETF market, but much of this money came from fund firms that were not previously ETF issuers.

It’s clear that the forces of market volatility, inflation, and risk are calling for new strategies. ETFs are often associated with passive investing, but investors are embracing a new wave of actively managed ETFs, which now make up about one-third of all exchange-traded products, with $396 billion in assets under management. (iv) Swap-based ETFs are also beginning to take hold, as investors look for levered or inverse exposure to more asset classes and tax efficiency.

As the landscape continues to evolve, small- to mid-cap ETFs risk getting lost in the shuffle. New and growing funds should look for a prime brokerage provider that will act as a partner, help grow market share and provide new and exciting solutions.

Active management adapts to market changes

A new crop of actively managed ETFs have continued to pick up assets in 2023 as larger index funds have posted lackluster returns so far this year due to ongoing fears of inflation and high interest rates.

For investors, active management provides the benefits of a traditional ETF but with a fund manager that can adapt to changing market conditions, like changing sector allocations or strategically deviating from the index. The ETF structure offers lower fees and more transparency than a mutual fund, but with the benefits of the managers’ expertise.

The gap between active and passive fund assets decreased to $1.2 trillion at the end of 2022-compared with almost $3 trillion in 2021-and institutional investors’ strategies show that they increasingly want actively managed portfolios. In a survey of 200 institutional asset owners, more than 25% indicated that they would increase their allocation to active equity strategies over the next two years.

Swap ETFs for increased asset class exposure

Synthetic ETFs, or swap ETFs, have been regaining traction in the United States for their tax benefits and edge when it comes exposure to hard-to-access assets, like commodities or the money market. In 2020, BlackRock launched the iShares S&P 500 Swap UCITS ETF, which has $919.83 million as assets under management. (v)

Because the fund uses a total-return swap, it differs from traditional ETFs because it doesn’t own any shares. These funds offer tax benefits because they don’t pay interest or dividends, so investors only pay capital gains tax upon sale.

Swap ETFs can more efficiently and accurately replicate large or illiquid market indices, and have a lower tracking error when compared to traditional ETFs. Risks can be offset by a daily swap reset and overcollateralization, and choosing a swap partner with a strong collateral base.

A new, innovative ETF partner

Record growth in US ETFs is projected to power the industry’s assets to $15 trillion by 2028 from roughly $7 trillion currently. As the industry continues to evolve, new and growing ETF franchises can get left behind by the big banks.

Clear Street is an independent, non-bank prime broker providing swap solutions for the next generation of ETFs. We’re powered by innovative technology and a high level of service for funds of all sizes.

Our experienced team is composed of some of the biggest names on Wall Street, all eager to partner with growing funds and provide white-glove service. Our ability to react quickly to market changes stems from our proprietary prime brokerage platform, which adds significant efficiency to the market, while focusing on minimizing risk and cost for clients. As we expand our services, our goal is to create a single source-of-truth platform for every asset class, in every country, and in any currency.