Analysis of last year's cash flow figures indicates challenges to BGI's No. 1 iShares brand could come in the future from some surprising places.
On the surface, State Street Global Advisors appears to be making a serious run at challenging Barclays Global Investors' longtime dominance in the $539 billion exchange-traded funds market.
In 2008, Boston-based SSgA attracted more net cash flow, some $64.1 billion, to BGI's $53.6 billion. No other ETF providers were even close, with Vanguard a distant third with $25.6 billion in inflows for the year, according to the National Stock Exchange.
In all, ETFs and their exchange-traded note cousins had a gangbuster 2008, as net inflows hit a record $180.4 billion, some 19% greater than a year earlier. (See full report here.)
Of course, some analysts are focusing on the fact that the industry saw a drop in total assets under management. And they've also noted a slowdown in new funds coming to market as a wave of ETFs were closed or merged.
But let's not talk right now about the fact that ETFs actually gained in sheer numbers—758 versus 646 at the end of 2007. Or, that the number of ETNs increased even more on a percentage basis.
And while ETF assets did fall in 2008, the industry wound up in much better shape along those lines than mutual funds.
A Changing Landscape
Still, simply studying gross asset levels provides a rather limited view of what's going on in the market.
Asset figures are calculated combining market returns and cash flows. In the short term, analyzing net flows—how much is going out as opposed to how much is coming in—can prove to be a much better barometer of future health than asset gains or losses in any given year.
So what clues does the latest data from 2008 reveal?
For one, even though SSgA's flows looked quite strong, that was a mirage of sorts. In fact, without the market's original ETF, the SPDR Index 500 (NYSE: SPY), the firm would've had significantly less inflows. SPY generated $34.6 billion alone in net inflows. Minus that production and SSgA's picture dropped to $29.5 billion net inflow.
Then consider that the SPDR Equity Gold Shares (NYSE: GLD) was the industry's third-biggest draw last year, with $4.3 billion in net inflow. Take that amount away and SSgA's cash inflow falls to around $25.2 billion. That would put it below No. 3 Vanguard's $25.6 billion and just ahead of ProShares' $20.4 billion. (No other ETF sponsors even came close to breaking into double digits by year's end.)
But let's not just pick on SSgA. In fact, looking at the top 10 ETFs by size last year, seven were iShares-branded funds. Besides the pair of SSgA funds, only one other made the elite group—the PowerShares QQQ (Nasdaq: QQQQ).
Backing out all seven popular iShares funds leaves BGI with some $23.6 billion less in net inflow. In other words, that means BGI, minus seven of its 175-plus ETFs, had close to $30 billion in net inflow during 2008. (See tables at the end of this column.)
Such a rather stunning statistic shows a lot about the stratified air surrounding today's ETF marketplace. The 10 most popular funds accounted for almost $62.5 billion in net inflows last year. That means another $115.9 billion was scattered among 748 other ETFs.
Is it fair to strip away assets from BGI in such a manner? No, since the seven funds represent some of the least expensive and most diversified players in their respective categories. The continued inflows into iShares as a whole leave little doubt that as a brand, it has earned widespread acceptance in the market.
But such a breakdown does indicate that BGI's seeming dominance in ETFs might face some cracks. After all, even the smallest of ETF providers realistically could be one—or more likely, a few—hit funds away from carving out a much bigger slice of a growing market.
That's probably why new launches aren't likely to go away anytime soon. They might slow. But as long as opportunities to strike the jackpot remain, ETFs will remain a surprisingly fragmented marketplace open to increasing levels of competition.
The fact that net inflows continued in such dour market conditions during 2008 stands as a strong statement about the move by ETFs into mainstream investing.
Winners & Losers
So who are some possible up-and-comers?
Certainly Vanguard has more room to grow, with nearly $7.5 billion more ETF net cash flow last year than in 2007. But one has to wonder about the fate of WisdomTree. It came in as the 11th-biggest ETF provider in 2008, with nearly $3.2 billion in assets. The fund provider had less than $1 billion in net cash flows, more than a third less than a year earlier.
WisdomTree's ETF family is heavily skewed toward international markets, though. That probably explains much of its slip, considering foreign stocks were hammered even more than those in the U.S. And strategists believe domestic markets will continue to be stronger in a new year. Many of those same experts, however, seem convinced that overseas markets hold the best prospects for long-term growth.