Exchange traded funds (ETFs) – baskets of assets traded as stocks by investors and institutions that typically charge lower fees than mutual funds – hit a record $2.865 trillion in April, driven by rising stocks, according to a report from ETFGI, an ETF researcher.
The ETFGI estimate is in line with a February report from PricewaterhouseCoopers that pegged ETF assets at $2.5 trillion and predicted they will rise to $5.9 trillion by the end of 2021, according to Investopedia. Nigel Brashaw, PwC partner and global ETF leader, said the estimates are based on survey data, analysis and modeling.
Milestone Reached Following Elections
The iShares ETF from BlackRock Inc. surpassed the $1 trillion asset mark for the first time in January, Reuters reported. The milestone came following a shift in markets following the November U.S. presidential election, carrying a stock rally.
ETFs’ low cost and tax efficiency is expected to drive this growth, along with investor disappointment with high fees and poor returns on actively managed funds.
The demand for ETFs has survived questions over the funds’ durability in periods of market stress.
Martin Small, the U.S. head of iShares, said clients are using iShares ETFs in place of individual securities to trade more efficiently than futures, individual bonds and swaps to assume long term positions.
Equity Markets Drive ETF Growth
“Investors continued to favor equities over fixed income and commodities as equity markets performed positively in April,” said Deborah Fuhr, ETFGI managing partner and co-founder. She said the S&P 500 was up 1%, while emerging markets and global equity markets outside the U.S. were both up 2% in April.
“Investors were captivated by a closely-fought first round of the French elections during April,” she said.
U.S. listed ETFs/exchange traded products (ETPs) gathered $36.09 billion in April, a record amount of net inflows for the month and marking the 14th straight month of net inflows, according to ETFGI, which according to its website is the leading independent research and consultancy firm on trends in the global ETF/ETP ecosystem, based in London, England.
Equity ETFs/ETPs took in the highest net inflows with $26.41 billion, followed by fixed income ETFs/ETPs with $8.83 billion. Commodity ETFs/ETPs suffered net outflows of $889 million.
Inflows year to date reached a record $169.71 billion compared to $45.31 billion last year.
iShares accounted for April’s largest net ETF/ETP inflows with $24.21 billion, followed by Vanguard at $9.93 billion and Schwab ETFs with $2.53 billion.
Year to date, iShares took in the largest net ETF/ETP inflows of $78.53 billion, followed by Vanguard’s $50.43 billion and Schwab ETFs’ $9.21 billion.
Passive ETFs To Lead Growth
Passive ETFs that track market indices will provide the majority of the next $1 trillion in U.S. ETFs, according to PwC’s Brashaw. PwC expects smart growth ETFs to be a more critical part of the market in the future.
Actively managed funds that are not transparent represent another segment of the market. The U.S. Securities and Exchange Commission (SEC) requires daily transparency of actively managed ETFs, Brashaw said. He said this segment of the ETF market will expand if the SEC eliminates the daily transparency rule, which does not apply to mutual funds. He predicts the transparency rule will be changed at some point in the future.
The transparency rule is less of an impediment to actively managed fixed income ETFs.
Cost Drives Passive Index ETFs
Low cost is the main consideration for passive index trackers, Brashaw said. For the other two types of ETFs, investment managers’ track records are the main differentiating factors.
The average ETF investor is usually younger or has higher net worth and more sophistication than the average investor overall.
Robo advisors tend to use ETFs on account of the lower cost. Robo advisors will face higher performance and digital delivery channel expectations over time.
More investment strategists are using ETFs for building portfolios, including some who completely use ETFs.
Bitcoin ETF Awaited
Cryptocurrency users, meanwhile, are awaiting the SEC’s approval of the first bitcoin ETF since it will make the cryptocurrency more accessible to the investors and enhance its credibility. The SEC rejected a bitcoin exchange-traded fund (ETF) sought by Tyler and Cameron Winklevoss in March, but the proposal is currently under review.
ETF holdings by individual investors have been stable at 45% to 55% of total U.S. assets even as interest from institutional investors and the ETF market itself has grown, according to Brashaw.
S&P 500 ETF Benefits
The S&P 500 is considered by many to be the best representation of the U.S. economy since it covers all the main economic sectors and covers about 80% of the country’s market capitalization. About $7.8 trillion of investor cash is held in the index’s equities, of which more than $2 trillion is in index ETFs.
Some S&P 500 ETFs do a better job of replicating the index benchmark while some do a better job at a lower cost.
Warren Buffet has suggested investing 90% of retirement funds in S&P 500 ETFs.
ETF Picks For 2017
Top ETF picks for 2017 according to Investopedia are as follows:
SPDR S&P 500 ETF (SPY)
Issued by State Street Global Advisors, SPDR S&P 500 ETF had $227 billion under management and has increased 4.13% year to date as of March with a 0.09% expense ratio.
SPY is a unit investment trust and technically not an ETF. It is the oldest of the S&P 500 benchmarked funds and has the most assets under management. The fund trades in excess of $25 billion daily, making it an attractive tactical trading instrument in addition to being a buy-and-hold investment.
iShares Core S&P 500 ETF (IVV)
With $94.5 billion assets under management, iShares Core S&P ETF gained 4.09% year to date as of March with a 0.04% expense ratio. The fund offers S&P 500 exposure at low prices. The fund is liquid for every class of investor, with more than 3 million shares trading daily.
Unlike SPY, the iShares Core S&P 500 is a true ETF, escaping the cash drag that is inherent in a unit investment trust.
Vanguard S&P 500 ETF (VOO)
With $61 billion in assets under management, the Vanguard S&P 500 ETF gained 4.09% year to date as of March with a 0.05% expense ratio. The fund offers low costs, high liquidity and offers large-cap coverage of an S&P 500 benchmark fund.