Trends We're Tracking: ETF Growth, Global Food Inflation, and the Banking Crisis

Envestnet | PMC provides independent advisors, broker-dealers, and institutional investors with comprehensive manager research, portfolio consulting, and portfolio management to help improve client outcomes. Every month our Global Macro Team offers insights into the themes currently shaping the markets to help you quickly take note of recent trends that your clients may be inquiring about.

Active ETF growth in focus

Asset management firms are targeting the active ETF space for active management growth. While ETFs have been widely known for their passive index-tracking strategies for several decades, the ETF rule passed in September 2019 created an opportunity for active managers and has brought in many new entrants. ETFs’ lower cost structure, tax efficiency, and greater transparency has attracted investors seeking an alternative to active mutual funds, where performance struggles and higher costs have proven challenging. While several of the new active ETF launches have targeted more niche segments garnering smaller asset flows, a few firms have been successful in attracting larger assets, leading others to follow. The majority of active ETF flows over the past 12 months was heavily concentrated among four firms, who attracted more than 70% of the active ETF flows. JP Morgan Asset Management predicts the active ETF segment may grow from $384 billion currently to $3 trillion over the next five years, a nearly eightfold increase, with the total ETF market expected to double in size. While active ETFs assets still comprise only a small share of the overall ETF market, at roughly 5% of the total $7 trillion in ETF assets, their share of inflows has spiked and brought greater attention to the active management vehicle. 

The Black Sea Grain Initiative cushions global food inflation, but risks remain

Despite war battering Ukraine, it continues to rank among the top exporters of staples like wheat, corn, and sunflower oil. While food prices remain at elevated levels, it has certainly cooled down from all-time high levels which were seen during the start of the war last year. The United Nations-brokered Black Sea Grain Initiative (BSGI) signed by Ukraine, Russia, and Turkey has played a key role in cushioning these food prices and avoiding a full-blown hunger crisis across the globe.

Prices of food staples started to ease in the second half of 2022 after two agreements were signed. The first is the memorandum of understanding between the UN and Russia to facilitate continued access of their food and fertilizer exports to global markets. The second is the BSGI, which ensured safe export of grains, fertilizers, and other agricultural produce from Ukrainian ports in the Black Sea region. So far, BSGI has benefitted both developed and developing countries, even though the stronger U.S. dollar prevented developing countries from enjoying the benefits of a global price decline. Nevertheless, the supply has helped in the continuation of food security programs in many of the least developed areas of the globe.

This agreement under BSGI was renewed in March 2023. However, the ongoing war and uncertainty about the duration of this agreement exposes its fragility and is a stark reminder that the risk of an upward spiral in food prices cannot be ruled out completely.

Regional Banks set to face more pressure

Regional banks have had tough start to the year. The industry faced significant pressure after the failures of Silicon Valley Bank and Signature Bank and many wondered if the entire banking system was set to fail. Although the government stepped in to help alleviate contagion concerns, fallout from commercial real estate debt could be the next issue the industry is set to face. Nearly 80% of commercial mortgages, representing about $2.3 trillion, are held by smaller banks and are set to expire in 2023. Owners with floating rate mortgages are will bear the financial brunt as interest rates have risen dramatically. Commercial real estate has already been under pressure as many have not yet returned to the office after the pandemic. If these borrowers can’t pay their loans, banks with under $250 billion in assets will face unique pressures.

The banking crisis’s impact on crypto

Silicon Valley Bank’s collapse has been in the headlines in relation to the recent banking crisis, but what may not be as well-known is the closure of two other banks, Silvergate and Signature. While these are smaller banks, and their closures are less significant in the traditional finance world, their fallout is having a substantial impact within the digital asset space. Silvergate and Signature provided the majority of financial services to crypto companies, as they both operated around the clock, real-time payment networks called Silvergate Exchange Network (SEN) and Signet. These services were vital to crypto companies, as they needed to transact 24 hours a day, seven days a week, a functionality which is not available with traditional banking networks. As such, their closures are making it difficult for crypto companies to continue operations, and many are concerned that this roadblock will set the industry back several years, as growth and development are stifled. 




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