The table below shows the ratio of the percent of net 2017 flows captured to market share as of December 31, 2016, along with the asset-weighted expense ratio (as of December 29, 2017).
The logical conclusion is that U.S. investors are building portfolios with a handful of cheap, broad, vanilla ETFs. Pretty much everything else is losing market share, except for cash equivalents.
New Year Celebration
U.S. investors have plenty to celebrate, as do top-asset-gatherer issuers BlackRock, Vanguard, SSGA and Charles Schwab, who jointly took in 87% of 2017 ETF net flows. This symbiotic relationship serves both well—investors get cheap, easy-to-understand, manageable portfolios, while the asset managers run a volume business that can scale, supporting low margins.
One wonders what will become of the mutual fund managers and purveyors of complex, expensive ETF strategies. Will they continue to launch new ETFs, buoyed by one-off success stories of tactical funds like the VanEck Vectors J.P. Morgan EM Local Currency Bond ETF (EMLC), and the ROBO Global Robotics and Automation Index ETF (ROBO)? Will the sizable inflows to actively managed equity ETFs like the First Trust North American Energy Infrastructure Fund (EMLP) encourage more of the old-line active mutual fund providers to give the ETF space a try? Will the dollars flowing to the iShares Edge MSCI USA Momentum Factor ETF (MTUM) and the Goldman Sachs ActiveBeta U.S. Large Cap Equity ETF (GSLC) convince asset managers to continue to support strategic-beta strategies?
Perhaps some will make the leap, hoping to beat the odds laid down by the cheap, simple, core strategies that dominated 2017. Others might decide that a small ETF footprint is better than none, and take the plunge. But sooner or later, all must compete against the simple, core, passive strategies that cost practically nothing, or move on to solve different kinds of financial problems. Anyone want to take on the savings rate?
At the time of writing, the author held no positions in the securities mentioned. Elisabeth Kashner is director of ETF research and analytics for FactSet.