20 Years In, It’s Clear ETFs Are Growing Up

February 05, 2013

With launches slowing, it’s clear the ETF industry is shifting to a higher, more mature gear.

The ETF industry is growing up before our eyes, with a number of notable events taking place over the past month.

  1. SPY, the SPDR S&P 500 ETF (NYSEArca: SPY), turned 20, escaping those awkward teen years and stepping out into the world as the elder statesmen of ETFs.
  2. ETF assets hit an all-time high of $1.4 trillion, and last month, roughly $30 billion flowed into the 1,400-plus funds trading in the U.S.
  3. We saw only five launches in January 2013. The last time fewer funds launched in one month was 2006, when subprime was still not a dirty word, MySpace was one of the most popular sites in the world, and Pluto was still considered a planet.

Of the five funds to launch thus far in 2013, there were two MLP-focused ETNs, an ETN with a covered call gold strategy, an equity fund with screening based on forensic accounting criteria and an active global corporate bond strategy.

The one thing all five products have in common is that they are far off the beaten path of the traditional passive beta exposure ETFs are typically known for. While there are hundreds of funds in registration at the Securities and Exchange Commission, the truth of the matter is that ETFs cover most of the nooks and crannies investors could possibly have interest in.

But obviously it’s been a long road to get to this point.

ETF industry growth has been remarkably similar to the traditional S-curve business development cycle everyone learns about in Finance 101.

Prior to 2005, only 180 ETFs were launched. These were primarily equity index-tracking products, with a sprinkle of bond index funds like the iShares Core Total U.S. Bond Market ETF (NYSEArca: AGG), the  iShares iBoxx $ Investment Grade Corporate Bond Fund (NYSEArca: LQD) and the iShares Barclays 20+ Year Treasury Bond Fund (NYSEArca: TLT) from BlackRock starting in 2002.

As with many hot new products, after a slow start, things picked up quite a bit.

Since 2005, more than 1,500 funds have been launched, of which almost 300 have been closed. And crucially, investment strategies and opportunities that were previously unavailable to retail investors were now accessible through regular online brokerage accounts.

This brings us to 2013. We had more funds close—six—than launch in January, and there are another 10 slated to close by the end of February. (These shutterings were announced last year, but carried out at the start of this year.)

It’s no exaggeration to say that ETFs are near an inflection point, transitioning from adoption to institutionalization.

All of this doesn’t mean it’s the end of product innovation. I wouldn’t dare sell issuers short regarding coming up with new strategies to put into a ETF wrapper.

However, the launch slowdown suggests that ETF issuers are taking notice of the growth in investor understanding of ETFs.

The time for the shotgun approach to launching funds is coming to an end. Going forward, it will be all about quality over quantity.

At the time this article was written, the author held no positions in the securities mentioned. Contact Gene Koyfman at [email protected].

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