2021 has been quite a year. If nothing else, we have learned about the importance of flexibility, as we continue to deal with COVID-19 and its variants, global supply chain disruption, questions around the future of work, and all the other things that are top of mind in light of where we are. Within the ever-intersecting worlds of financial services and technology, there are a few key trends that are worth watching as we close out the year.

The normalization of direct indexing

This has been the year of the deal when it comes to direct indexing. There were several high-profile acquisitions this year, all of which underscore the degree to which industry participants see this capability as essential to the future of wealth management. Many wonder what is driving the activity. At its core, there is nothing special about the capability itself. For over two decades, institutional investors have had access to asset managers that can fully replicate an index or provide a sampled replication. The reason for the heightened interest is two-fold. First, technology has allowed us to bring this capability down market to serve smaller accounts. Second, consumer expectations are changing. In almost every other business interaction, consumers experience some degree of personalization. As investors seek more alignment between their values and how their money is invested, those who cannot meet these demands will fall behind. Moreover, as the industry seeks to deliver more value for a given level of fees, tax management becomes a critical tool in the kit of financial advisors and other providers that manage money for individual investors. As we transition from 2021 into 2022, I expect activity to continue and the focus to shift from direct indexing to personalization of the wealth management experience, with a specific focus on unified managed account capabilities. At SEI, we have spent a lot of time thinking deeply about this and are excited about where we are headed.

The continued rise of cryptocurrency

On October 18, 2021, ProShares launched the first bitcoin strategy ETF. Within two days of its inception, the ETF was very near the Chicago Mercantile Exchange Group’s (CME) former limit on front-month contract holdings.1,2 The speed of adoption of the ETF was further validation of the demand among investors for access to cryptocurrencies in more traditional formats like mutual funds and ETFs. With over $2 trillion dollars invested in the top 50 coins by market capitalization, it’s a large and growing market that isn’t going anywhere any time soon.From a regulatory perspective, the Securities and Exchange Commission (SEC) seems to agree with this notion and is working with other government bodies to address concerns around transparency, tax compliance, and investor protection. These are important steps that can help to clarify any regulatory uncertainty that may be causing concern among market participants. If we think more broadly about digital assets and blockchain applications across industries, we are sitting on the cusp of technological change that can drive broad participation and wealth creation in multiple areas. In the coming year, I expect we will continue to see broader access through the launch of new funds, including access to “Layer 2” tokens, and increased engagement from regulators that can drive clarity and spur additional investment in the space beyond that from early adopters.

The emergence of the metaverse

During my MBA program at Wharton, I spent more hours than I care to admit playing what was then described as a “game.” Only, it wasn’t a game. It was a fully immersive world called “Second Life” that you could participate in. An article about a virtual real estate developer drove my intrigue. At the time, the developer had made a few million dollars developing real estate in this game. As a pseudo-techie looking for ways to procrastinate outside of YouTube videos, I set up my avatar, named Worthington Vaughn, and off I went. This world had multiple locations that you could visit. It had its own currency, the Linden. You could buy plots of land, build houses, and set up businesses. Much like the real world, you had a range of activities available for your avatar to participate in. 

I’m not sure what happened to “Second Life” and I haven’t logged in since 2007, but I can say that it was an early version of what we are seeing today. Meta (the social network formerly known as Facebook), a few crypto projects like Decentraland, and others are engaged in bringing a more modern version of the metaverse to life. It will be interesting to see how this develops in a world where our technological capabilities have advanced significantly. Metaverse applications have the potential to impact multiple aspects of our lives. 

Again referring back to my time in business school, two classmates and I submitted a series of ideas to a business competition, one of which was related to the metaverse. Imagine using desktop applications on a virtual computer that you can visualize and engage with in the metaverse. At the time, they didn’t like the idea, but I would submit that the questions around remote work will be further challenged when you consider this type of virtual presence, in particular as hardware that supports these experiences continues to mature. While we are still in the early stages, just like COVID-19 forced a digital shift in client engagement and business processes, the emergence of the metaverse will drive future considerations and interactions between those in financial services and the end investors. Fortunately, while it’s not a 2022 issue to take action on, it’s absolutely something to pay attention to throughout the year. It will only take a few more multi-million dollar virtual real estate deals for clients to start asking questions.4 

Important Information:

Investing involves risk including possible loss of principal. Tracking error risk is the risk that the performance of a portfolio designed to track an index may vary substantially from the performance of the benchmark index it tracks as a result of cash flows, portfolio expenses, imperfect correlation between the portfolio’s and benchmark’s investments and other factors. This risk is magnified when sampling a benchmark index as the strategy may not track the return of its benchmark index as well as it would have if the strategy purchased all of the securities in its benchmark index.

Bitcoin and bitcoin futures are a relatively new asset class and the market for bitcoin is subject to rapid changes and uncertainty. Bitcoin and bitcoin futures are subject to unique and substantial risks, including significant price volatility and lack of liquidity. The value of an investment could decline significantly and without warning, including to zero. You should be prepared to lose your entire investment. To date, bitcoin ETFs may only invest in bitcoin futures contracts and do not invest directly in or hold bitcoin. The price and performance of bitcoin futures should be expected to differ from the current “spot” price (“spot” price refers to the price of bitcoin that can be purchased immediately) of bitcoin. These differences could be significant. Bitcoin futures are subject to margin requirements, collateral requirements and other limits that may prevent an investment from achieving its objective. Margin requirements for futures and costs associated with rolling (buying and selling) futures may have a negative impact on an investment’s performance and its ability to achieve its investment objective. Bitcoin is largely unregulated and bitcoin investments may be more susceptible to fraud and manipulation than more regulated investments. Bitcoin and bitcoin futures are subject to rapid price swings, including as a result of actions and statements by influencers and the media.

A unified managed account (UMA) is an investment account that can include a variety of securities, such as mutual funds, stocks, and bonds, among others. These securities are often components of investment of strategies managed by one or more third party professional money managers.

In futures markets, a front-month contract is the active futures contract with the shortest time to maturity.

According to PCMag.com5, a Layer 2 token is a token whose underlying blockchain is “an independent blockchain acting in concert with Bitcoin or Ethereum, which retroactively became known as a "Layer 1 chain" or "main chain." Layer 2 chains process new transactions faster while reducing the load on Layer 1 and typically taking much lower fees.”

1. "First Bitcoin ETF Is Already in Danger of Breaching a Limit on Futures Contracts," Bloomberg, bloomberg.com, October 21, 2021. 
2. "Market Surveillance," CME Group, cmegroup.com, September 30, 2021. 
3. Source: Coinmarketcap.com, as of 9:00 a.m. on December 6, 2021.
4. "Virtual real estate plot sells for record $2.4 million," Reuters, reuters.com, November 24, 2021.
5. “Definition of Layer 2 blockchain.” PCMag, pcmag.com, 2021. 

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