Innovation Key To ETF Growth

Star ETF performance over the past few months rooted in innovation as well.

Reviewed by: Dan Weiskopf
Edited by: Dan Weiskopf

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 serving to monitor the trends in the ETF ecosystem. ETF Think Tank produces this monthly report for

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Fed Will Accelerate ETF Growth
The Fed’s blessing, as the biggest central bank on the globe, to buy bond ETFs is a watershed moment no matter how you cut it. Investors reacted by pumping money into the markets, as’s Sumit Roy points out—ETF flows were $48.8 billion in April, bringing year-to-date flows to $121.1 billion.

All this, of course, has led to market sentiment flipping positive again, and it is clear that the ETF wrapper is a hero in building investor confidence toward the ability to provide price discovery, maintain orderly markets and reflect investor sentiment.

The downside looked ugly, and some today argue the upside appears irrational. Nevertheless, assets under management as of May 3 were down to $3.96 trillion as compared with $4.44 trillion as of Dec. 31, 2019. (Editor’s note: Market-cap valuations impact the total ETF assets under management.)

Head Winds Ahoy
For the first time in history, the industry-trailing 12-month open/close ratio dipped below .97 (211/218). This was telegraphed by the Invesco news back in December.

The number of ETFs traded in the U.S. now stands at 2,270, down from 2,298. Launches during April and March were concentrated in a few issuers’ hands, totaling eight in March and 27 in April: American Century, Innovator and BNY Mellon.

American Century, arguably, was the most important launch relative to innovation with its active ETFs that offer a longer semitransparent disclosure window. In terms of AUM, it’s noteworthy that BNY Mellon’s zero expense ratio ETFs were launched with the largest AUM base for the month.

Innovation ETF Lifeblood
Innovation is the lifeblood of our industry, which I write about in a white paper titled “Measuring ETF Innovation.” In this paper, I write about a new industry KPI that measures a ratio between low cost solutions versus access, alphas and active.

As our industry is known for acronyms, we came up with ACAI or “Annual Client Alignment to Innovation (ACAI).” How these three different series of fund families succeed as measured by ACAI will be an interesting test of the KPI metrics over time.

Where Active ETFs Stand
Active ETF strategies gained momentum over these past two extraordinary months, and now represent 2.50% of the U.S. ETF AUM (previously 2.31%).

But what is more curious is 6.68% of our “ETF Expense Ratio 12-Month Revenue” projection is now in active; previously, it was 6.05%. This increase came as AUM decreased by about 10% and therefore projected revenue declined to $7.2 billion from the last 12-month run rate projection of $8.25 billion.

The change came mostly as active ETFs stayed flat at about $102 AUM while passive declined.

As a baseline, at the end of January, it is noteworthy that there were 280 ETFs that are fully transparent actively managed ETFs, and that this number is now 275. The revenue number is up from $6.83 billion in December 2018 and will bounce around, but reflects an important aspect of innovation in the ETF industry.

Asset Chart

Innovation Will Fuel Growth
The current framework of the ETF has 1,325 equity ETFs, or 58% of the market AUM. However, the future framework of ETFs will be about market conditions and how ETF sponsors build ETFs that are aligned with current client investor needs.

Given that both market conditions and client needs are dynamic, we think ETF innovation needs to be measured beyond just low cost.

Put simply, the success of firms like Innovator, American Century and BNY Mellon come from meeting the right needs at the right time.

Contact Dan Weiskopf at [email protected]

Dan Weiskopf is a Toroso portfolio manager and member of its investment committee. He has over 30 years of portfolio management experience, with almost 20 years as an ETF strategist. Dan is often quoted as saying that "structure matters" more in selecting an ETF than simply its fee.