2016: Year Of ETF Investors Acting Rationally

January 10, 2017

[Editor’s note: The following originally appeared on FactSet.com]

ETF investor behavior in 2016 made tons of sense. Cheap, simple vanilla strategies, which emphasize mimicking the market rather than taking bets against it, gained steam.

More complex strategies proved to be a harder sell, despite massive promotion of the space. Tactical strategies, such as currency hedging, fell out of favor.

The most sensible move: the continued deterioration of irrationally constructed funds—those that focus on the listing exchange, the IPO date or the security type. And don’t forget the cost savings. The median expense ratio of the 90 funds that attracted $1 billion or more was a mere 0.15%, which is well below the asset-weighted industry average of 0.24%. Is it any surprise that $180 billion of 2016’s net $283 billion inflows went to vanilla funds that cost 0.15% or less?

2016 saw fierce competition in the ETF asset-gathering arena. Among U.S.-domiciled ETFs, broad-based, cap-weighted ETFs beat out more complex strategies on all fronts. As a group, vanilla funds drew in more assets—by dollars, by percent and, critically, in proportion to their starting market share—than their complex competitors.

S&P 500 tracking funds single-handedly captured 17.7% of 2016’s net US ETF inflows.

The losers: complex strategies such as the WisdomTree Europe Hedged Equity Fund (HEDJ), which saw $7.8 billion of outflows, and exchange-restricted funds like the PowerShares QQQ Trust (QQQ), which suffered $2.5 billion in redemptions.

Asset-Gathering By Strategy

Here’s the big picture for 2016 asset-gathering for U.S.-domiciled ETFs, by strategy:

 

 

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