Exchange-traded funds have been in the investing mainstream for years. In 2017, they became the default.
ETFs saw record growth during the year, with both institutions and retail investors piling into the investment vehicle. ETFs hold baskets of securities like mutual funds but trade intraday like stocks. Among other attributes, advocates tout the transparency of the structure, as well as the greater tax efficiency, and in 2017 investors seemed more willing than ever to listen. There are now ETFs tracking essentially every sector, region and asset class, and basically every category of fund saw growth in the year.
According to data from Credit Suisse, inflows for exchange-traded products topped $424 billion in 2017 through November. (ETPs include both ETFs and the much smaller category of exchange-traded notes.) Not only does that shatter old records, but it is a stark demonstration of how investors are favoring ETFs over other investment vehicles. Mutual funds, for example, only saw $91 billion in inflows over that same period.
According to data from research firm ETFGI, there is $4.429 trillion in global ETF assets (ETFGI’s data is through October), compared with $3.396 trillion at the end of 2016 — meaning the universe has grown by more than a trillion dollars in less than a year. Over 2016, in comparison, ETF assets grew by a relatively paltry $522 billion, meaning adoption was twice as aggressive this past year.
U.S.-listed equity funds have seen $308.5 billion in year-to-date inflows, according to FactSet, which is not only a record for stock ETFs but is larger than the entire ETF industry has ever seen in a year. Fixed-income products had $120.5 billion in inflows, a record for the industry.
“ETFs have become the optimal choice for portfolio allocation, and this trend is definitely going to continue,” said Matthew Bartolini, head of SPDR Americas Research at State Street Global Advisors. SSGA is one of the three major ETF sponsors, along with Vanguard and BlackRock’s iShares, which together control about 70% of the market.
“There’s been broader adoption in all walks of life. Retail investors have gotten more accustomed to using these vehicles, and the industry has done a good job of breaking down the myths about liquidity, which has added to their being used more and more.”
In October, Goldman Sachs estimated that U.S. flows into ETFs would hit $400 billion over 2018. Such a target would mean the U.S. ETF market grows by about 13% next year, excluding price changes in the underlying assets.
The growth reflects the unique position ETFs hold in the investment universe. First, there is the ongoing shift toward passive products, which has been gaining steam for a decade but seemed to hit a tipping point over the past couple of years. There’s been a steady drumbeat of data showing that simply buying the market — as opposed to trying to do better than it through individual security selection — almost always leads to better returns over the long term, and ETFs are dominated by passive products.
The most popular fund of the year in terms of inflows, the iShares Core S&P 500 ETF
, is one of the most vanilla funds on the market, offering exposure to the primary U.S. equity-market benchmark. It amassed some $30.8 billion in inflows, according to FactSet.
ETFs have also benefitted from the move to low-fee products. Of the top 10 equity ETFs of 2017, measured by their inflows, the most expensive (the iShares MSCI EAFE ETF
had an expense ratio of 0.32%, or $32 for every $10,000 invested. For fixed-income products, the most expensive — the iShares J.P. Morgan USD Emerging Markets Bond ETF
—charged 0.39%. Other widely adopted funds charge less than 0.05% of assets, which make them wildly cheaper than actively managed products, which charge more than 0.8% on average, according to Morningstar Direct data.
2017 has been a year of high-profile fee cuts and new entrants undercutting their rivals by launching funds with lower expense ratios. In many categories, fees have fallen so much that institutional investors instead look to factors like liquidity and trading spreads in making their investment decisions, and in November Vanguard launched a fund with an industry-low fee, and urged investors to “consider elements beyond the expense ratio.”
The popularity of the ETF structure has meant hundreds of new funds getting launched over the course of the year. Per ETFGI data, there are nearly 5,400 ETFs traded globally, up from about 4,800 at the end of 2016. This growth has come alongside a rising number of fund closures, as few new products are able to amass the assets that are seen as necessary for them to be profitable.
Finally, and not insignificantly, ETFs have benefitted from the ongoing bull market across most major assets. The S&P 500
is up 18.8% over the course of the year, hitting multiple records, while global stocks haven’t had a negative month since October 2016. Major bond categories are higher as well, and ETFs offer easy access to all those parts of the market.