What US ETF Market Looks Like Today

It was just 24 years ago that the first ETF, the SPDR S&P 500 (SPY), came to market—ETF No. 1.

Now, with 51 new ETF launches having already occurred this year, we are about to hit a milestone: 2,000 ETFs listed in the U.S.

These funds already command more assets than hedge funds in an asset base that grows about 20-25% yearly. With nearly $3 trillion in assets in U.S.-listed ETFs alone, some are already projecting the size of the market to double by 2020.

If you talk to those who were part of the ETF industry’s early days—people like State Street Global Advisors’ Jim Ross and iShares’ former head Lee Kranefuss, you get a sense that no one would have guessed ETFs would take off as they did, and reinvent the way investors access the market.

“The growth of ETFs in U.S. capital markets is a textbook case study in ‘Disruptive Innovation,’ right alongside well-known historical examples like Amazon, Google, Facebook, Netflix and scores of others successful enterprises,” ConvergEx Nick Colas said in a commentary this week. “It is no exaggeration to say that there are more ETFs than investable stocks listed on U.S. exchanges.”

Today’s market definitely looks very different from its early days. The era of plain-vanilla products designed around well-known equity indices is giving way to a wave of innovation that has ETFs tapping into broad, diverse and niche pockets through various strategies today.

Here’s a broad overview of the market’s makeup, with data courtesy of FactSet:

Asset Class

Equity ETFs dominate in numbers and in assets. Roughly 70% of all U.S.-listed ETFs are equity funds—or some 1,385 ETFs in the market today. These U.S. and/or international equity ETFs have about $2.2 trillion in combined assets. That amounts to 78% of all U.S.-listed ETF assets, or nearly $8 out of every $10 invested in ETFs today.

Investors have plenty of choices when it comes to equity ETF exposures.

The biggest of these funds are all focused on U.S. stocks, led by SPY, with $233 billion in assets. IVV comes at No. 2, with $103 billion; and VTI at No. 3, with $76 billion. Those three ETFs alone represent about 25% of assets specifically in U.S. equity ETFs, and 19% of all assets tied to equity ETFs, either domestic or international.

Fixed income ETFs—the second-largest asset class in this industry—command about $490 billion in total assets, the bulk of which is in U.S. fixed-income funds. This is a segment of the market that’s still growing.

There are only 317 fixed-income ETFs on the market today, which represents about 16% of all U.S. ETF listings. Many see fixed income as a still-opening-up frontier for more ETF innovation.

The remainder of the market is split into smaller slices: Alternatives ETFs represent about 2.6% of the total market; asset allocation ETFs 2.2%; commodity ETFs 5.7%; and currency ETFs 1.5% of the total number of U.S. ETF listings.

Smart-Beta ETFs

Market-cap-weighted strategies were the first, and remain the largest number of, funds in the market. But it’s smart-beta funds that are driving asset growth and product innovation.

Smart beta goes by many names—some call it strategic beta, fundamental indexing, factor investing and more. But the ETFs in this category are simply rules-based strategies that aim to deliver better risk-adjusted returns than traditional market-cap-weighted indexes. They apply different selection screens, and weight securities in different ways to deliver a spectrum of results.

Today there are roughly 800 smart-beta ETFs on the market—that’s four out of every 10 ETFs in the market—and funds falling under this rubric represented roughly half of the ETFs that launched last year. Among equity ETFs, nearly half are some flavor of smart beta today. In the fixed-income space, where active management is still widely accepted, smart beta has been slower to find a following—only about 9% of all fixed-income ETFs today are smart-beta funds.

Costs

ETFs have always been known for their low cost, and ongoing fee compression keeps pushing price tags lower.

The cheapest ETFs on the market today carry a mere 0.03% expense ratio—that’s $3 per $10,000 invested. They are:

• Schwab U.S. Broad Market ETF (SCHB)
• Schwab U.S. Large-Cap ETF (SCHX)
• iShares Core S&P Total U.S. Stock Market ETF (ITOT)

These are all vanilla strategies, and as the market moves more toward smart-beta approaches, expense ratios have averaged higher because the more complex a fund is, the more it usually costs. But even in the smart-beta segment, fee compression is real.

The cheapest smart-beta ETFs today have 0.04% expense ratios—a pair of Schwab growth and value funds that use a multifactor selection process to pick securities, which are then market-cap-weighted in the portfolios.

Most ETFs today have expense ratios between 0.3% and 1.0%. But there are funds that come with hefty expense ratios. There are 22 ETFs that have expense ratios of more than 2%, and the most expensive ETF has an ER of 9.20%—that’s $920 per $10,000 invested. It’s the VanEck Vectors BDC Income ETF (BIZD).

ETF Issuers

Roughly 82% of all U.S.-listed ETF assets are managed by three single ETF issuers—BlackRock’s iShares, Vanguard and State Street Global Advisors. iShares’s dominance is uncontested, as the firm alone commands about $1 trillion of all ETF assets in the U.S.

But there are a growing number of ETF issuers, with new firms looking for ways to join the bandwagon as investors demand access to the ETF wrapper.

Today we count nearly 80 ETF issuers in all, each trying to find their niche in a market that’s increasingly diverse.

At the end of the day, the number of ETF launches—which outpaces ETF closures year after year—and the continued entry of these new ETF players, suggest that 2,000 ETFs with nearly $3 trillion in the U.S. alone may very well be just the beginning for this “disruptive innovation” of an industry.

Contact Cinthia Murphy at [email protected]