ETF Edge

Here are the top four themes driving the ETF industry this year

These 4 themes will take hold in the ETF space in 2020, industry pros say

Investors' 2020 vision is in focus.

As exchange-traded fund industry leaders gather for Inside ETFs, the world's largest ETF conference that kicked off in Hollywood, Florida, on Monday, several trends will be front and center for the space's top brass.

Among them are the discount brokers' fee wars, the advent of nontransparent and semi-transparent ETFs, thematic funds and ESG (environmental, social and governance) investing.

Here's what two industry pros — Todd Rosenbluth, senior director of ETF and mutual fund research at CFRA, and Chris Hempstead, director of institutional business development at IndexIQ — see ahead for those four trends in 2020, based on their Wednesday interview with CNBC's "ETF Edge."

The fee wars

This year, the online brokerages' "race to zero" commissions — which has seen Interactive Brokers, Charles Schwab, TD Ameritrade and others cut their stock and ETF trading fees to zero — is set to continue among ETF issuers.

With State Street planning to switch the benchmark for its SPDR Russell 1000 ETF (SPLG) to the S&P 500 index later this month, enabling the issuer to charge just 3 basis points for an S&P-mirroring fund (like Vanguard's counterpart), that competition for assets will also shed light on ETF quality, Rosenbluth said.

"IShares has a 4 basis point ETF, IVV, Vanguard has a 3 basis point [ETF], VOO, but you're really going to get to see that there's a major difference in ETFs beyond the fees," he said.

Hempstead, an avid proponent of investors doing their homework before they buy, wholeheartedly agreed.

"We've said this time and time again: look under the hood and do your homework," he said. "The fee is just one part of a multipart equation. Fee net of performance is what really matters. If you want to get an ETF that has the strongest performance, sometimes that's going to come with a higher fee. Not everything is just a broad-based S&P index fund."

The next leg of this battle could get granular, Rosenbluth predicted.

"What we are going to see is the fees are going to come down for everything else that's not the market-cap-weighted strategies," he said. "We've seen it in smart beta, in thematic [investing]. We're going to continue to see it in 2020."

Nontransparent ETFs

Hempstead and Rosenbluth will be watching for whether the newly SEC-approved nontransparent fund structure will be able to attract assets.

The big question at hand: Will active managers, who have seen their assets contract in the mutual fund space for over a decade, perform any better in an ETF structure?

If you ask Hempstead, "the performance has to be there. The manager has to perform," he said.

"With 2020 being the launch year, or what many of us anticipate will be the launch year, for nontransparent or semi-transparent, the question is, will the assets come in? Will we see retail and institutional demand? That is yet to be seen," Hempstead said. "We do expect a lot of these funds to come to market with a significant asset base. Now, the breadth of ownership is what we're going to be looking for. Is everybody buying it or just one or two people?"

Rosenbluth will have his eye on the "heavy hitters" taking advantage of the new strategy, which include T. Rowe Price, Fidelity, American Century Investments and Legg Mason.

"T. Rowe Price, which does not exist in the ETF world, has $170 billion of actively managed mutual fund strategies where there will be an ETF version ... coming in 2020," Rosenbluth said. "There's a whole lot of firms that have strong brand names that have a record of outperformance and modest fees for active management that are coming out."

Thematic ETFs

ETFs built around themes like robotics, cloud computing, video gaming and cannabis are likely to see modest gains in 2020 as they continue to steadily climb, Rosenbluth and Hempstead said.

"When the S&P was up over 30%, investors were not looking to find that shiny object, the strategies that are more narrow and focused," Rosenbluth said of 2019. "But the ones that did outperform, I think, are likely to see assets continue to climb."

Rosenbluth flagged the VanEck Vectors Video Gaming and eSports ETF (ESPO), which ran 42% higher in 2019, and the Global X Robotics & Artificial Intelligence ETF (BOTZ), which ended last year up nearly 31%.

"I think things that worked investors are going to gravitate towards as they're looking for more narrowly focused strategies," he said.

Hempstead issued a small warning for investors looking to buy into a theme.

"The asset growth in these kind[s] of thematic funds, you have to take it with a grain of salt. People aren't going to put 100% of their portfolio into a thematic idea in most cases," he said. "They're going to take a smaller percentage of their portfolio, take a little bit of risk there, and that's why you won't see hundreds of billions of dollars flowing into a thematic fund."

The ESG explosion

ESG (environmental, social and governance) investing could become a central theme among ETF investors in 2020.

"We're super excited about ESG at IndexIQ. We've launched two products with Candriam," Hempstead said, referring to his firm's IQ Candriam ESG US Equity ETF (IQSU) and IQ Candriam ESG International Equity ETF (IQSI).

"[Candriam is] one of the global leaders in ESG fund management," he said, adding that "there's definitely demand. There's definitely a mandate globally to be more ESG-friendly in the investment themes, and that growth is going to continue."

Rosenbluth said the excitement around ESG is already off to a strong start.

"We're already seeing it. In January, we could have a record month," he said. "We've already seen two iShares ETFs, ESGE and ESGU, the emerging market and the U.S. version of some of their suite, gather $1 billion already. We could see a record year as BlackRock and other firms like IndexIQ are more committed to the space than before."