ETF Growth: What You May Not Know About ETFs

You probably know that ETF growth has been surging in recent years. Here is some of what you may have heard:

  • There are a lot of ETFs to choose from.  
  • There are a lot of ETF companies (aka “ fund sponsors”), some with recognizable names and some not.  
  • There are a lot of assets flowing into ETFs.  
  • ETFs have distinct advantages over mutual funds and other traditional investment vehicles (at least for some use cases).   
  • There are a lot of ways to incorporate ETFs into a portfolio.  

To set the stage, it is important to note that there is a huge market for ETFs, and it’s growing.

Here are some current U.S. ETF market statistics to illustrate ETF growth (from www.xtf.com):

There are over 1,990 U.S. Exchange Traded Products (ETPs), which includes Exchange Traded Funds (ETFs), and Exchange Traded Notes (ETNs). There are 103 sponsoring firms, 127 index providers and they are listed on the three principal stock exchanges in the U.S. (ICE/NYSE, NASDAQ, BATS). Finally, there is just over $2.77 Trillion (“T”) in assets under management (AUM) across these products.

So far, so good.

Chances are, there is an ETF which meets your investment needs if you know where to look.  Interestingly, by the end of 2016, the top 10 domestic U.S. ETFs had amassed just over $700B in AUM, representing nearly 25% of total domestic ETF AUM. These same 10 ETFs pulled in over $95B in new AUM representing or ~32% of 2016 inflows.  

Digging in a bit further, the “Big 10” funds all track major market indices have comparatively low expense ratios compared to average, and trade  >2 million shares per day.

Finally, the top 3 ETF fund sponsors, Blackrock (iShares), Vanguard, and State Street (SPDRs) account for roughly $2.23T of the $2.77T in AUM by market cap boasting an impressive 80% share of the market.

So, what about all of those other ETPs and sponsors? Well, over 1,650+ ETPs have less than $1B of AUM and trade less than 300K shares per day.  

In 2016, at least 5 of the top 10 performing ETFs averaged less than 1M shares traded per day and higher expense ratios than the “Big 10.” This suggests that expense ratios, as important as they can be, are not the sole criteria for evaluating ETF growth potential.

So, this brings about a set of important questions about ETF growth:

1. Why are assets flowing to ETFs and what are the differences between ETFs, mutual funds and individual stocks?

2. What are the different types of  ETFs (factor based, smart beta, equal weight)?

3. How does one evaluate different ETFs?

4. What are common ways to incorporate ETFs into an investment strategy?

I will address these topics, and more, in upcoming blog articles.