State Of ETFs 2017 Presentation

January 31, 2017

[Editor’s Note: The following is a revised version of the State of ETFs keynote given at InsideETFs on Jan. 23.]



Each year, we kick off InsideETFs by looking at the year that was, and giving our thoughts on what we think is in store for the ETF industry in the coming year, and beyond. This year, however, feels a little dark.



After all, 2016 was the year we lost Bowie, Prince and Leonard Cohen. No more Heroes, no more Purple Rain, no more Hallelujah. That’s a rough year.



But for ETFs, the story was different. ETFs had a very good year indeed, maybe one of the best years ever. 

$284 billion is a lot of money. That was the net flows into ETFs in 2016. That’s almost $1,000 for each man, woman and child in the United States.



In fact, it’s a record. And not in the way most records are made, by just inching over an imaginary line from the past. This was a blowout. This was Michael Phelps in a Shark Suit racing against the local YMCA team.


And yet even that understates the magnitude of what happened in 2016, because the mutual fund number was propped up by flows into index funds. If you just ignore vehicles and look at the flows out of active and into passive across all kinds of funds, the real number is even more astounding. It’s over $844 billion. That’s $1.6 million a minute. Count to four. That’s $100,000 that moved from active to passive.



Things are so bad for active managers that the active manager pulling in the most assets last year was actually Vanguard, and the list of managers gaining assets gets pretty thin from there. 



And it’s not just flows. We’ve seen this continuous increase in the use of ETFs as trading vehicles. This chart, which we show every year, is the ETF share of trading across all the exchanges in the U.S. Not only have we settled in around 30% of the dollar value on all exchanges, importantly, we’ve started to break the longtime connection between volatility and ETF trading. The connection still exists: On a volatile day, you still get an increase in the importance of ETF trading. But the measured correlation between the CBOE VIX index and ETF share-of-trading has gone from the high 70s in 2013 to the low 60s now. 



Figure 1
(For a larger view, please click on the image above.)


And at the same time, the industry is starting to feel awfully crowded. This fantastic chart from Victor Lin at Credit Suisse, arguably the best data analyst in the ETF space, maps out each issuer by the year they entered, and their assets. Just look at all the issuers on the right who’ve come in who have yet to cross $1 billion. This market is crowded, and it’s getting harder, not easier, for a new entrant to gain scale.

Still, overall, it’s a positive record: new players, record volumes, record flows. The ETF industry is becoming a dominant force in asset management, which has led some in the traditional active space to get concerned.



This was the title of a paper by Sanford Bernstein last August (which we covered extensively at This wasn’t a blog post, but a deeply researched attempt to address the “what if everyone indexed?” problem. The arguments aren’t exactly wrong, but the conclusions are a bit inflammatory:



The thing is, while we could argue about the math, the hyperbole of this is so dramatic it can’t help but seem like sour grapes—as if Fraser-Jenkins is chasing another famous Inigo:


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