2014 ETF Flows Blow Through 2013 Record

[Editor’s Note: This story has been updated with final year-end flows data.]

Investors plowed upward of a quarter-trillion dollars into U.S.-listed ETFs in 2014, obliterating last year’s record inflows of $188 billion in the latest sign that investors are waking up to the virtues of relatively cheap, transparent, tax-efficient and highly tradable ETFs.

U.S.-focused strategies were by far the most popular—hardly a surprise given that the biggest economy has been leading the world out of the huge downturn caused by the subprime mortgage crisis and the spike in oil prices that lifted the price of a barrel of crude in New York to nearly $150.

Oil prices have since cratered to less than $53, providing support to consumers still reeling from the fallout of the crash. The Federal Reserve’s loose monetary policy has also been supporting the economy, although—in the U.S. at least—investors are expecting possible rate increases next year now that the Fed has ended its extraordinary purchase of bonds that put quantitative easing into the vernacular of the age.

Writ large, total U.S.-listed ETF assets in 1,669 products rose to a record of more than $2 trillion in 2014, lifted by inflows of nearly $244 billion and a 13 percent increase in the S&P 500 Index. At the end of 2013, total assets were $1.701 trillion. Astonishingly, 38 percent of the record 2014 inflows, or $94 billlion, came in the final two months of the year.

By comparison, hedge funds now manage about $3 trillion, and open-end mutual funds have around $15 trillion in assets. To some analysts, it’s only a matter of time before ETFs overtake both.

The U.S. exchange-traded fund market’s smart expansion in 2014 was marked by the number of product launches far outnumbering the number of fund shutterings, as a nearly 6-year-old bull market in stocks and an expanding economy emboldened fund sponsors.

A total of 197 new ETFs and ETNs were rolled out in 2014, compared with 162 in all of 2013, according to data compiled by ETF.com. On the flip side, fund closures reached 88 in 2014, compared with 73 closures in 2013. Both 2014 figures are relatively high—an indication fund companies are optimistic about interest in ETFs but also realistic about closing ETFs that don’t resonate.

Top-Heavy Industry

Almost a third of those assets are in the 10 biggest strategies, with about 10 percent of that $2 trillion total in the largest of them all, the $220 billion SPDR S&P 500 ETF (SPY | A-98). To put a finer point on the concentration of assets, the three biggest ETF sponsors—BlackRock’s iShares, State Street Global Advisors and Vanguard—control more than 80 percent of all U.S.-listed ETF assets.

Unsurprisingly, SPY was the most popular strategy in 2014, pulling in around $25 billion in fresh assets. In the Nos. 2 and 3 spots were SPY’s direct competitors, the the iShares Core S&P 500 ETF (IVV | A-98) and the Vanguard S&P 500 ETF (VOO| A-97), which both gathered more than $10 billion.

Foreign stocks were generally hammered in 2014, and outflows of more than $5 billion from the iShares MSCI Emerging Markets ETF (EEM | B-97) was clear evidence of that. BRIC stalwarts—Brazil, Russia and China—are all stumbling:

• China’s growth is slowing.
• Putin’s Russia, highly dependent on energy, is faltering under the weight of falling oil and gas prices as well as sanctions resulting from its conflict with Ukraine.
• Endemic corruption in Brazil is denting that country’s economy.
• Of the four BRIC countries, only India is thriving.

Gold ETFs continued to lose assets, including SPDR Gold Shares (GLD | A-100), which had redemptions of more than $3 billion, helping to push it out of the list of the 10 biggest ETFs for the first time in years.

A Bright Future For ETFs

Still, notwithstanding the ETF’s industry top-heavy characteristics, the ETF world remains a hotbed of innovation and is without question the most vibrant pocket of the financial services industry.

Many large players are beginning to make tangible moves into ETFs, with New York Life’s planned acquisition of boutique ETF firm IndexIQ the clearest example that big financial conglomerates are ready to join the ETF world.

IndexIQ markets the IQ Hedge Multi-Strategy Tracker ETF (QAI | B-73), a nearly $1 billion hedge fund replication strategy that, in many ways, represents more carefully calibrated strategies that many newcomers are likely to prospect as investors look increasingly to the ETF to address a broad variety of needs.

In fact, a distinct class of advisors, so-called ETF strategists, has emerged in the past few years, which now controls about $100 billion in ETF assets—about a fifth of the total. These advisors are designing a broad variety of asset-allocation plans—usually for advisor-clients. Most are exclusively using ETFs and, to the extent that ETFs afford new ways to access markets and manage risk, they are threatening to end long-embraced paradigms of money management such as style boxes.

To restate the mantra long carted out to explain why ETFs are slowly making inroads into the world of asset management, it’s hard to argue with such an inexpensive, tax-efficient and tradable vehicle that has democratized access to various and sundry pockets of the investment universe.