ETF Growth Concentration Continues

[This article appears in our November 2019 issue of ETFR.]

Earlier this year, CFRA released a report that looked at data on more than 1,600 ETFs for a five-year period, “Analyzing ETF Success & Failure: A Five-Year Look Back.” The report considers the growth of the targeted ETFs, the issuers behind them and closures, among other data. ETF Report spoke with one of the authors of the report, Todd Rosenbluth, CFRA’s head of ETF and mutual fund research, about what he and colleague Aniket Ullal discovered when they dug into the data.

What was the overall objective of the study, or what you were aiming to document?
There’s a lot of great ETF commentary published on ETF.com and on other outlets that track fund flows, that track closures, that track winners and losers within the ETF landscape. But most of it’s done within a shorter window of time—either on a monthly basis, or on a calendar year basis.

We felt there was a lot of additional information that could be gleaned with a longer-term or an intermediate-term view, and set out to look back roughly five years in time. That’s a reasonable period of time to judge an ETF’s viability, a reasonable period of time to let the winners and losers shake out, a reasonable period of time for products that might have been a fad or that saw brief demand, only to have that demand peter out.

We’re intentionally omitting a few things. Our goal is to avoid survivorship bias, so we consider the same ETFs over the five-year period. We wanted to understand what ETFs closed. Obviously, as of August 2019, 25% of these products are done, so the winners would look even stronger and the losers would look even worse in that period of time, if we had shaken those products out. There have been hundreds of products that have come to market since then. We have left those out of the equation too.

Our goal is to follow the targeted products through their life cycle (see Figure 1).

What results stood out the most to you?
It’s extremely hard as an ETF analyst to keep track of what’s disappeared, what’s closed. There’s a handful of ETFs that we tend to remember, that probably should have never launched and died very quickly. But there are so many other products that were around for a period of time, and then they’re just gone from the consciousness. And unless you went digging and searching for those products, you wouldn’t know it.

The fact that nearly 25% of the products closed was a higher number than I expected. Now, closures aren’t necessarily a bad thing—it’s a sign of a mature industry.

The other thing that surprised us—and it’s still a very small number—was that 30 ETFs had an objective change. It’s easy to miss these products, because most of the objective changes were because the products were so small, and not top of mind for investors and/or ETF analysts like myself, so that it was easy to ignore.

The fund isn’t in our window of reference after 2014, but the cannabis ETF, the ETFMG Alternative Harvest ETF (MJ), was a Latin America real estate ETF before switching themes. And that’s far and away a poster child of this happening. Now, it’s a $1 billion product. But we’re big believers in holdings-level analysis. When a Taiwan ETF becomes an India ETF, the track record is irrelevant; the holdings are what matters.

Also, during the last couple years, Vanguard and BlackRock have stood out among the pack, in terms of flows, with their low-cost, asset allocation products. But I think it’s extremely enlightening to see that 69 of the top 100 ETFs that experienced the most growth were from those firms. Those two firms have broad product lineups, and their success has been broadly based.

Just 100 ETFs accounted for 83% of the cumulative asset growth during the study. Is that problematic for the ETF industry, or is that just the 80/20 rule in play?
I think it’s the 80/20 rule on steroids, because it’s actually just 7% of the products that experience more than 80% of the cumulative asset growth. It speaks to the fact that this industry is relatively concentrated, both at the firm level and at the product level. It speaks to the challenges that relatively new entrants into the ETF market have.

What was also compelling to me is the top 20 ETFs from the end of 2014 and then as of August of 2019 (see Figure 2). There are certainly similar products that are on both lists, and there are some products that climbed onto the table that were under the radar before. There are some products that moved out of favor or where investors traded to alternatives.

So it isn’t a static list of winners. I can say with confidence that that winners list will continue to evolve, and we’ll see firms and products that are younger, that have success.

It did strike me how similar the lists were from 2014 to 2019.
It’s partly the role that costs are playing in investors’ minds, much more so than we at CFRA think they should. Cheaper products aren’t necessarily the same products. The iShares MSCI Emerging Markets ETF (EEM) fell off of the top 20 chart as the iShares Core MSCI Emerging Markets ETF (IEMG) came up on to it. The iShares MSCI EAFE ETF (EFA) is still on the chart, but it dropped significantly as the iShares Core MSCI EAFE ETF (IEFA) moved up.

Using iShares as my reference point, to see the iShares Core S&P Small Cap ETF (IJR) join the list, when it wasn’t part of it beforehand, was interesting. Small caps were dominated years ago by the iShares Russell 2000 ETF (IWM). But IWM is now No. 19. It went from a top 10 to a top 20.

I would say there were certainly some shifts, but not always to low cost and cheap. Even though the Invesco QQQ Trust (QQQ) is a reasonably priced product at 20 basis points, it’s not a go-to example for low-cost asset allocation. Still, it nearly doubled in size in the five years, and actually moved up a spot in the rankings. It’s not clear-cut (see Figure 2).

The SPDR S&P 500 ETF Trust (SPY) is finally giving ground a little to the iShares Core S&P 500 ETF (IVV) and the Vanguard S&P 500 ETF (VOO). They’ve been so much cheaper for so long, is it just that SPY is so cheap anyway, that those little price differences don’t make much of a difference?
I think it’s two opposite stories here. You’ve got a growing number of wealth management advisors and retail investors that are embracing ETFs, and that are focused on cost. And in this case, when the products are identical in the exposure that provides all of the same S&P 500 securities, cost is a differentiator for investors. The fact that we’ve seen such strong adoption of ETFs with our clients at CFRA, and our clients tend to be more wealth management focused, I think it’s a favorable sign that now more than half of the S&P 500 index-based assets are in IVV and VOO.

But the flip side to that is, if expense ratio were the only thing that mattered to investors, and to all investors, then we would have seen a greater shift. SPY remains the largest, most frequently traded ETF. That appeals to a wide array of investors. And while it’s certainly lost market share—it’s now 47% [of the AUM of the three ETFs tracking the S&P 500], down from 69%—it’s still got a large lead over its individual competitors.