The snowball of ETF asset growth is speeding up, thanks in large part to investors’ obsession with cost.
We all took pause when the U.S. ETF market hit a record $287.5 billion in net creations in 2016. But consider that the asset haul on a trailing 12-month basis is currently $466.4 billion, according to Bloomberg data.
That’s right. The ETF market has gathered nearly half a trillion dollars in the past 12 months alone. If this pace holds, the industry will hit that $500 billion-a-(trailing)-year mark before the summer is over. That figure is practically double what it was a year ago, and it’s something the industry has never really seen before.
It has also helped push the U.S. ETF market across the $3 trillion-in-total-assets mark this week. This is massive growth, and it could very well be the new normal.
“You could say Trump kicked this off, and in the post-election euphoria, ETFs have gone from gathering $1 billion a day to $2 billion-$3 billion a day regularly,” said Eric Balchunas, senior ETF analyst at Bloomberg. “But it’s much deeper than the Trump trade now. There’s a tipping point where advisors are switching over, institutions are using more ETFs because they are more liquid. There’s more at play.”
All About Cost
What’s driving this growth? First and foremost, cost—“the mother of all trends.”
“Cost has become almost an obsession because investors feel they can trust cost. They can’t trust performance anymore,” Balchunas said. “And in a low-volatility environment where everything is casually moving up together, cost is king.”
The bulk of the net creations in the past year went into ETFs that cost 0.15% or lower. Among the most popular ETFs are funds like the iShares Core S&P 500 ETF (IVV), which saw $17.3 billion in inflows; the iShares Core MSCI Emerging Markets ETF (IEMG), which attracted $10.7 billion; and the Vanguard FTSE Developed Markets ETF (VEA), the Vanguard S&P 500 ETF (VOO) and the iShares Core MSCI EAFE ETF (IEFA), which each gathered more than $8 billion.
The cheapest of these ETFs, IVV and VOO, each carry an expense ratio of 0.04%. The most expensive of them, IEMG, has a 0.14% expense ratio.
The data also tell us that it is advisors and retail investors driving this asset growth. In an increasingly fee-based world—and one that now falls under the Department of Labor’s fiduciary rule—low-cost ETFs make a lot of sense.