Yum Yum Vanilla
Once again, ETFs that track broad-based, cap-weighted indexes are pulling in assets and increasing their market share. Pity the poor blogger who has to fluff up the story with the headline that reads “boring is hot!” Vanilla funds, representing 72% of total ETF assets at the end of 2016, pulled in 82% of the January flows.
The list of ETFs ranked by inflows has 18 of the top 20 slots filled with cheap, simple ETFs. For the 125 U.S.-domiciled ETFs that saw inflows of $100 million or more in January, the asset-weighted expense ratio came to just 0.17%. That’s pretty darn cheap. And all these funds track indexes that aim to fully represent their opportunity set. Simple.
Where it gets more complicated is the actual exposures. In contrast to 2016’s focus on funds like SPDR S&P 500 ETF Trust (SPY), 2017 opened with inflows to everything but U.S. large-cap equities. U.S. large-caps pulled in just one-fifth of the flows that would be expected based on market share alone. The fastest growers among funds that gathered $500 million or more were bonds, led by U.S. Treasurys. Indeed, vanilla bond funds were responsible for all the growth of vanilla market share, pulling in 1.86 times as many dollars as their starting AUMs would suggest.
Not So Hot
With actively managed and vanilla ETFs gaining market share, who lost it? Mostly the oddball idiosyncratic funds, but also the so-called “smart beta” ETFs.
Idiosyncratic funds—ETFs tracking indexes that refer to noneconomic principles such as listing on a specific exchange, social responsibility or equal share weighting—have been losing favor for some time. Last year was rough on most of these, save for ESG funds. And 2017 started out the same way, with one big exception: Dow 20,000 drew lots of assets into the price-weighted SPDR Dow Jones Industrial Average ETF Trust (DIA).
Exchange-specific funds lost $1.02 billion in outflows in January, nearly all of it from the PowerShares QQQ Trust (QQQ). That’s nothing new; QQQ has been steadily losing assets for years. Indeed, QQQ’s losses would have thrown the entire set of idiosyncratic funds into the outflows column, were it not for inflows to DIA.
DIA tracks the venerable, but oddly built, Dow Jones industrial average, which tracks a single share each of 30 U.S. mega-caps. With the run-up to 20,000, DIA’s share count ran up to levels last seen with any consistency in the summer of 2013. The effect of the cumulative run-up in share count since Election Day shows up in the green AUM line in DIA’s fund flows chart:
For a larger view, please click on the image above.