Cheap Passives Dominated 2017

January 19, 2018

In 2017, vanilla ETF’s market share increased, while strategic funds lost the most ground. In segments where strategies go head-to-head for investor dollars, vanilla funds took in $15.8 billion more than their starting market share would have projected; strategic funds lost $19.3 billion of flow opportunity.


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While overall flows to all strategies were positive, growth rates were uneven. Actively managed funds posted the highest growth rate, increasing assets by $3.8 billion more than their starting 1.1% market share would have predicted. 


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Active management’s fast growth in the ETF space owes much to the strategy’s small overall footprint. By the end of 2017, active ETF AUM was at $44.7 billion, or 1.3% of ETF AUM. Rapid growth, with flows of $15.5 billion, gained actives an overall .2% of market share. Active funds picked up the most speed in commodities and alternatives, but the dollar gap was largest in equity, especially in the master limited partnership space.

By contrast, vanilla funds added $373.2 billion, to a year-end market share of 72.4% of assets, which fed a 1.2% market share gain. Even with the extraordinary growth rate for active funds, vanilla saw the largest increase in market share.

Asset Classes & Strategies

As investors left more expensive and complex passive strategies behind, the worst-hit were currency-hedged strategic beta funds, which suffered $2.46 billion in outflows. Their vanilla competitors fared better, with $2.9 billion of inflows—positive results, but far short of the $9.3 billion they would pull in if every fund grew evenly. Currency hedging was simply out of fashion in 2017. Optimized commodity funds fared no better, shedding $918 million of assets in 2017.

In contrast, some of the newer strategies gained market share. On a dollar basis, multifactor and momentum funds increased their market shares by $2.8 and $2.5 billion, respectively. Momentum funds also showed a high rate of market share increase. Various types of hedging (buy-writes, duration-hedging and volatility-hedging) also kicked up their market shares, an oddity in a year of increasing and calm equity and bond markets. These pockets of successes in smart beta, along with active management, offered hope to those rooting for complex strategies in the ETF space in an environment that favors simplicity.

Simplicity was in style at the portfolio level, too. In 2017, ETF investors favored basic portfolio building blocks—stock or bond ETFs with a wide geographic mandate, that cover the majority of the investable landscape. In other words, broad vanilla exposures like U.S., developed, emerging markets equity, or U.S. investment-grade bonds gained ground over tactical exposures like sector funds, commodities or high-yield bond ETFs. Cash-equivalents also increased their market share—capturing 2.1% of net flows, despite starting the year at only 0.5% of ETF AUM.


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