2019 ETF Growth Nearly Matches SPY Returns

The ETF Think Tank is a community of advisors focused on a client-centric approach to investing through the use of ETFs. Each week, we disseminate research on the growth of the ETF industry, including key performance indicators (KPIs) on number of ETFs listed, assets, revenue, exchange market share and number of issuers. This data is useful in monitoring the trends in the ETF ecosystem. ETF Think Tank produces this monthly report for ETF.com.

US ETF Asset Growth 31%

In 2019, assets under management (AUM) in U.S.-listed ETFs grew 31%, a growth rate symbolically close to matching the index performance of the S&P 500 index (technically 30.67% vs 31.49%).

What a fitting way to conclude the last decade of evolutionary growth in the ETF industry. Investors have clearly bought into the evolution, with annual U.S. fixed income ETF inflows outpacing U.S. equity ETF inflows for the first time, with U.S. fixed income at $135.4 billion and U.S. equities at $130.2 billion.

Aggregate inflows totaled a whopping $326.3 billion, second only to the $476.1 billion in 2017.

Softness Continues In Open-To-Close Ratio

As of Dec. 31, there were 2,302 ETFs listed in the U.S., down eight from November.

The 12-month trailing number of new launches declined further from November, at 239 to 233, down from 264 since the July 2019 report.

A declining number reflects that investor choice and ETF innovation may be maturing. The number of closures was at 151, which leads to a 1.54 open-to-close ratio (233/151).

The news about Invesco projecting to close 42 ETFs in the first half of 2020 could lead to an open-to-close ratio that finally goes below 1, but such a data point would only signal a short-term statistical imbalance.

Fixed Income ETF Growth Accelerating

At the end of 2019, U.S. ETF assets were $4.418 trillion, an all-time high.

Equity ETF AUM is 59.9% of the aggregate ETF AUM in the U.S., and fixed income ETF AUM is 18.3%. That translates to year-end equity AUM at $3.42 billion and fixed income at $808.8 billion.

The fact that inflows were so close signals that the breadth of ETF usage is increasing. Further to the point, the $135.4 billion in inflows into fixed income is a 54% increase over the $87.8 billion that came in 2018.    

The “average ETF ownership influence score” remained static at 7.50%, reflecting flows toward fixed income. The ownership influence score is the average amount of the market cap of every U.S. stock owned by ETFs.

Revenue Grows To All-Time High

The average weighted expense ratio for U.S. ETFs remains steady, at 0.19%. However, due to increased assets, the projected 12-month revenue from expense ratios has increased to a new high of $8.24 billion, up 20.6% from $6.83 billion in December 2018.

The revenue also continues to diversify away from low-cost, traditional beta and toward nontraditional passive “smart beta” ETFs and active ETFs.

The percentage of ETF revenue from nontraditional passive ETFs at the end of 2018 was 36.38%, while at the end of 2019, it was at 38.75%.

Active ETF revenue also gained market share, growing from 5.11% to 5.78%. Although traditional passive represents 55.47% of revenues, this is down from 58.52%.

To that point, using the ETF Think Tank Classification Tool (below), it is worth noting that the aggregate ESG [environmental, social governance] category, with $15.6 billion in AUM, charges an average of 0.38%. as a group. Meanwhile, thematic ETFs hold AUM of $65.9 billion, and charge an average of  0.63%.

Of course, seeking alpha by investing in thematic and/or ESG ETFs are not necessarily mutually exclusive goals. For those who seek to manage their portfolio expense line in terms of active share, ETF Think Tank offers this tool that helps to quantify the cost of actively managed ETFs:

The Coming Decade

ETF growth in assets under management  is expected to continue to grow by leaps and bounds in the coming decade.

Forecasts of AUM growth to $30 trillion by the year 2030 make for great headlines and potential savings for investors, but I just hope that client-centric advice remains valued at a premium. Knowledge and experience take time.

Contact Dan Weiskopf at [email protected]