January 28, 2022

U.S. Fund Families Add New Responsible Investing Funds and ETFs to Their Lineup in 2021

by Tom Roseen.

The U.S. fund business added 689 unique new funds (including ETFs but excluding share classes) in 2021. And despite the popularity of passively managed funds, 536 of these funds were actively managed. Collectively, these new funds attracted some $149.7 billion in net inflows for 2021, with passively managed funds attracting some $104.4 billion and actively managed funds taking in $45.3 billion.

On the Responsible Investment (RI) funds side—which include funds with traditional socially responsible investing strategies, ESG investment strategies, impact investing strategies, and the like—fund families added 148 unique (again ignoring share classes) RI funds to their lineup. Of these, 103 were actively managed while 45 were passively managed. For the one-year period ended December 31, 2021, passively managed new RI funds attracted $4.6 billion, while their actively managed counterparts took in $10.8 billion.

These new fund trends, however, do not match the flow patterns seen for all funds (which include the new funds cited above). In the table below, we see that actively managed funds, including money market funds, took in $633.8 billion for 2021 (with money market funds [+$413.7 billion] accounting for the majority of net inflows), while their passively managed counterparts attracted $903.2 billion.

On the Responsible Investment side, we see similar flow trends with actively managed RI funds taking in $30.9 billion for 2021, while their passively managed RI counterparts attracted $45.7 billion, despite actively managed RI funds’ assets under management (+$277.3 billion) being significantly higher than the passively managed RI fund assets under management (+$153.1 billion) on December 31, 2021.

Diving a bit deeper into our macro-classification subgroups for RI funds, we see that estimated net flows into both domestic equity and world equity macro-groups favor passively managed products, similar to the broader fund universe, with flows into passively managed RI U.S. diversified equity funds (+$28.1 billion), sector equity funds (+$5.3 billion), developed international markets funds (+$7.2 billion), and emerging markets funds (+$1.9 billion) eclipsing those into their actively managed RI counterparts (+$9.2 billion, +$1.9 billion, +$4.9 billion, and $1.6 billion, respectively).

However, the stickiness of RI fund flows, which we have cited several times before, breaks away from what we are seeing in the overall universe (which includes both RI and non-RI funds), where actively managed USDE funds continue to see major net outflows, handing back $212.2 billion in 2021, while their passively managed counterparts attracted an eyepopping $343.6 billion for the same period, highlighting investors’ overall continued interest in passively managed funds.

It is worth noting that just four ETFs and one conventional fund accounted for more than half of those broader-market passively managed inflows into USDE funds, with Vanguard 500 Index ETF (VOO, +$46.8 billion), Vanguard Total Stock Market Index ETF (VTI, +$44.0 billion), SPDR S&P 500 ETF (SPY, +$36.9 billion), iShares Core S&P 500 ETF (IVV, +$27.9 billion), and Fidelity 500 Index Fund (FXAIX, +$26.8 billion) attracting the lion’s share of net new money for 2021. Meanwhile, actively managed developed international markets funds (+$8.2 billion) attracted significantly less than their passively managed counterparts (+$112.9 billion).

Turning our attention back to RI funds, we note that similar to the broader universe of funds, actively managed RI mixed-assets funds (+$2.7 billion), taxable fixed income funds (+$10.5 billion), and municipal debt funds (+$331 million) outdrew their passively managed counterparts, which took in $62 million, $3.0 billion, and $0, respectively, for 2021.

So, on the responsible investment side of the ledger, investors are still more likely to use actively managed funds. This makes intuitive sense, being that most of these funds take an active approach to securities selection, by using negative screening; best-in-class sustainable practice screens that focus on environmental, social, and governance practices, policies, and performance; and even focused social or environmental outcome practices, often referred to as impact investing. All, generally, lend themselves to more active management, although rules-based and quantitative methodologies do allow for passively managed RI strategies.

For 2021, the primary individual attractors of investors’ assets on the responsible investment side of the equation were iShares ESG Aware MSCI USA ETF (ESGU, +$8.1 billion), Catholic Responsible Investments Equity Index Fund, Institutional Shares (CRQSX, +$3.5 billion), iShares ESG Aware MSCI EAFE ETF (ESGD, +$3.2 billion), iShares Global Clean Energy ETF (ICLN, +$2.6 billion), and Vanguard ESG US Stock ETF (ESGV, +$2.5 billion).

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