Aided by a strong first half for equity markets and growing demand for fixed income ETFs, the U.S. ETF industry crossed a major milestone on July 5: $4 trillion in assets according to data on ETF.com.
While it took nearly eight years to reach the first trillion dollar mark, increased adoption by the wealth management and institutional markets shrunk the gap to just two years for the move to $4 trillion from $3 trillion in assets under management.
The SPDR S&P 500 ETF Trust (SPY), launched in January 1993 and, with $272 billion in assets and average daily dollar volume of $18 billion, remains the largest and most liquid ETF.
However, in recent years, driven by a focus on low-cost ETFs to support asset allocation strategies, the iShares Core S&P 500 ETF (IVV) and the Vanguard S&P 500 ETF (VOO) have gained market share and are the second and fourth largest funds. (The Vanguard Total Stock Market Index ETF (VTI) is the third largest ETF overall.)
What’s Fueling Demand
Interest in ETFs providing S&P 500 exposure for a miniscule 0.03% or 0.04% expense ratio has been aided by acceptance of research that consistently outperforming the equity benchmark has been a challenge for active managers. Indeed, the average large cap fund has lagged the “500” every calendar year since 2009, according to S&P Dow Jones Indices.
U.S. equity ETFs now comprise 57% of the $4.02 trillion pie and asset growth has expanded beyond the initial market-cap-weighted index-based strategies to smart beta and actively managed ETFs.
Indeed, the iShares Edge MSCI Min Vol U.S.A. ETF (USMV) gathered $5.9 billion of net inflows in the first half of 2019, making it the third most popular ETF for the period.
USMV invests in stocks like Coca-Cola and Pfizer that have historically incurred low volatility. This has appealed to investors that are skeptical that the strong start to 2019 equity markets may not persist.
(Use our stock finder tool to find an ETF’s allocation to a certain stock.)
USMV is a twist on the first generation of ETFs, but still index based. Investors have historical data they can analyze and the rule book to understand when changes are being made.
However, the supply is growing of actively managed ETFs, such as the Vanguard US Value Factor ETF (VFVA), which are run by portfolio managers with discretion to add or remove stocks from the portfolio whenever they deem appropriate. CFRA expects additional active ETFs that provide limited holdings transparency to launch in the second half of 2019.
Fixed Income ETFs Growth Driver
With 19% of overall ETF assets, fixed income ETFs would seem an unlikely category to drive the industry to the $4 trillion mark. Yet these ETFs garnered $75 billion in new money in the first half of 2019, equal to 57% of the $132 billion cash haulm even with a whopping $34 billion of net inflows for U.S. equity funds in June. Five of the 10 largest inflows this year were in fixed income funds, with diversity among the leaders.
For example, the iShares 20+ Year Treasury Bond ETF (TLT) incurs highly elevated interest rate risk but benefits from the modest credit risk of the U.S. government.
Meanwhile, the Vanguard Total International Bond ETF (BNDX) has a duration of only eight years (TLT’s is 18 years), but invests in bonds issued in Germany, Japan and Italy.
CFRA expects ETFs will continue to rapidly gather assets in the second half of 2019 and in the coming years as both a replacement for and a complement to individual stocks and bonds.
Shifting To ETFs Evident
According to Charles Schwab’s 2019 ETF Investor Survey, 79% of respondents view ETFs as the investment vehicle of choice. Though these investors have 36% of their portfolio in ETFs, 63% would consider placing their entire investment portfolio in ETFs.
ETFs provide diversified access to equity, fixed income and other asset classes in a low-cost, easy-to-trade portfolio. Since launching research coverage of ETFs more than a decade ago, we have seen the product proliferation firsthand. CFRA now offers ratings on 1,508 ETFs, using a combination of holdings-level analysis and fund attributes including a focus on costs and liquidity.
This article was originally published on MarketScope Advisor. To gain access visit www.cfraresearch.com/marketscope-advisor.