Next Legs Of ETF Growth Emerge

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 ETF.com.

October closed the month with a few ETF treats.

First, let’s focus on the obvious two KPI records.

Assets under management (AUM) for U.S.-listed ETFs closed the month at a record month-end value of $4.15 trillion, and the number of ETFs now trading are 2,307, despite an open/close ratio of 1.62.

The third record set came in the sector ETF category, though at about $461 billion in AUM, also curiously saw the $78.5 billion value of the REIT ETF sector eclipse the $77.5 billion technology sector.

There are 505 sector ETF choices that make up this category, representing about 22% (505/2,307) of the total number of ETFs, but concentration of AUM means that market share ($461 billion/$4.5 trillion) is roughly half, at 11%.

This means that hundreds of innovative ETFs are still looking for commercial success. Having more choice, as a portfolio manager, is better.

Open/Close Ratio

The year-to-date open (235)/close ratio (145) is calculated simply by dividing the open ETFs by the closed ETFs during year-to-date periods. As a metric, it is a constructive benchmarking tool for assessing the breadth of the commercial success of the ETF industry expansion.

However, someday it could even go inverted—meaning more closures than launches. The barriers to launch may have gone down due to regulatory changes, but the barriers to successful asset growth have certainly gone up.

Next Legs Of Growth

We are optimistic that investor choice, access and innovation will lead the ETF growth in 2020 and beyond. Fixed income and alternatives could lead the growth. However, the concentration of sponsors presents innovation challenges—and it may feel it is almost like an oligopoly.

Vanguard has 80 ETFs across $1.076 trillion. This means that it has 25.6% of market share, behind BlackRock iShares’s 39% market share or $1.622 trillion across 355 ETFs.

That’s well ahead of State Street’s 16% AUM market share, with $665 billion across 128 ETFs. Together these three firms make up about 81% of the AUM in the U.S.-listed ETF marketplace, but only 24.4% of the choices.

Put another way, on a per-choice basis, Vanguard, State Street and iShare are offering 3.4%, 5.5% and 15.4% of ETF choices, respectively. As result of recent acquisitions, Invesco offers 256 ETFs, an additional 5.09% AUM market share and 11.09% share of the choices.

ETF Menu Grows

Free or cheap beta from broad passive may draw the bulk of flows in a bull market. However, the number of choices in fixed income and alternatives are expanding.

Currently, active management represents 2.23% of AUM but 5.76% of revenues. As larger brands compete using ETF solution providers with Precidian ActiveShares ETF or with alternative active structures, we see this pie expanding at a faster pace in terms of pure numbers.

Smart investors and fiduciaries agree that diversification is important to risk management and lowering volatility. As a metric for measurement, this is why having an ETF strategy is important.

Dan Weiskopf can be reached at [email protected]