US ETF Assets Hit $1 Trillion Milestone

December 15, 2010

Seventeen years and more than 1,000 funds later, U.S. ETF assets surpass $1 trillion on Thursday, Dec. 16.

Assets in U.S. ETFs reached $1 trillion on Thursday, a major milestone for an industry that began 17 years ago with the launch of the SPDR S&P 500 ETF (NYSEArca: SPY) on Jan. 29, 1993.

The original designers of SPY thought the ETF would appeal only to traders; indeed, it was initially designed in large part to bring new trading volume to the (now defunct) American Stock Exchange.

SPY eventually did prove successful with traders, but the audience for ETFs has expanded to include everyone from retail investors to the largest institutional investors in the world.

SPY, now with almost $92 billion in assets, sits atop a universe of more than 1,100 funds that’s already poaching market share from actively managed mutual funds. Indeed, mutual fund sponsors have lined up at the Securities and Exchange Commission in the past year to obtain permission to launch ETFs, and their arrival on the ETF scene could be a huge development in the industry.

Much has changed since the SPY launched in 1993, especially the money management industry itself, where commission-based stock pickers have been surpassed by fee-based asset managers who view thoughtful asset allocation using low-cost vehicles, increasingly ETFs, as the best way to deliver solid risk-adjusted returns at the right price.

“Costs certainly matter, and clients have certainly taken notice,” said Rick Genoni, head of ETF strategy at Valley Forge, Pa.-based Vanguard Group, now the No. 3 U.S. ETF firm.

“Frankly we’ve only just scratched the surface on the opportunity here, and I think that’s true for the industry,” Genoni added, noting many advisors—and clients who don’t use advisors—still don’t use ETFs in a meaningful way.

Yesterday's final push over the $1 trillion mark, appropriately enough, was led by $10 billion in U.S. equity creations and included $8.3 billion of inflows into SPY itself, according to data compiled daily by IndexUniverse.com. The data include all exchange-traded products, including exchange-traded notes, though the vast majority of assets are in ETFs.

Exceeding Expectations

Nate Most, the ETF executive at the American Stock Exchange widely credited with conceiving the idea of an exchange-traded fund, never imagined the ETF universe could expand past more than five index funds tracking the biggest U.S. equity benchmarks, according to James Ross, head of ETFs at SSgA.

Ross said the ETF’s trajectory, from its conception as a simple trading vehicle to its role as the centerpiece of so many core and satellite asset allocation strategies, is nothing short of amazing.

“The ETF is one of the most innovative, if not the most innovative, development in the financial markets in the last 20 years,” Ross said in a recent telephone interview.

“Looking at the landscape and seeing how it’s changed—we now have everything from domestic, international, emerging, fixed income, commodities currencies, active. You can see how it’s going to propel itself forward in the future,” he said.

Still, countless sources—fund sponsors, advisors and industry consultants alike—tempered their optimistic outlooks with calls to make ETF education one of the industry’s central concerns, even as “exchange-traded fund” gradually becomes a household word.

“The real challenge today is that many people—journalists, bloggers, analysts, etc.—just call everything an ETF,” said Deborah Fuhr, a London-based managing director in charge of ETFs with BlackRock, which owns the world’s biggest ETF company, iShares. “Sometimes the products are structured as funds, sometimes they’re structured as partnerships, or notes or grantor trusts, and that can imply different tax or regulatory implications.”

“Some people spend more time selecting a TV than they do when they’re looking at some of the investment products that are out there,” she continued, stressing that investor education is more important than ever, since products haven’t grown any simpler as they become more popular—in fact, much the opposite.

 

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