Seven new ETFs are coming to market Thursday—six fundamental strategies from Schwab, and an emerging market dividend fund from Emerging Global—pushing the total number of U.S.-listed ETFs above 1,500 for the first time.
Clocking in at 1,497 U.S.-listed funds as of today, Thursday’s launches will bump that number up to 1,503 ETFs. The milestone comes despite what has been a 40-percent-plus decline in the pace of launches year-to-date relative to the same period in 2012, and nearly twice as many fund closures so far in 2013 versus year-earlier figures.
There’s nothing particularly important about such a milestone, but round numbers can offer a good opportunity to look back and take measure of how far an industry has come. So far, 2013 has in fact been full of interesting milestones for the 20-year-old ETF industry.
For starters, January 2013 brought the 20 th anniversary of the industry’s beginnings—the very first ETF, the SPDR S'P 500 ETF (SPY), was launched in January 1993 and now ranks as the world’s largest, with some $130 billion in assets.
Also, the Sector SPDRs are turning 15 this year . The SPDRs were at the forefront of sector-specific investing, offering investors for the very first time the ability to hone in on sector exposure to the S'P 500 and express tactical views on the broad economy and on business cycles in a way they couldn’t before. Since inception, the suite of nine sector ETFs—which, combined, represent the S'P 500 as a whole—have amassed more than $70 billion in assets.
The SPDRs anniversary is also noteworthy in the sense that these funds claim to have been the very first ETFs to attract both institutional and retail investors alike, as ALPS’ Dan Dolan, one of the brains behind the funds, told IndexUniverse in a recent interview. Often, those two groups of investors don’t tread the same waters.
And it’s a growing demand from both of the groups, in particular institutional customers, that’s been driving the latest expansion of the ETF industry, some say. According to the Investment Company Institute, or ICI, institutional investors have found ETFs “a convenient vehicle for participating in, or hedging against, broad movements in the stock market” in recent years, ICI said on its website.
“Increased awareness of these investment vehicles by retail investors and their financial advisers also has influenced demand for ETFs,” it said.
ETF providers have been quick to meet that demand. It took roughly 14 years, from 1993 to 2007, for the market to reach its first 500 U.S.-listed ETFs, and only about three years after that to double that amount by 2010. Now, here we are at 1,503 funds just 2 ½ years later, and let’s not forget that around 300 ETFs have come and gone since 2001.
That leads us to yet another milestone this year:The growing number of ETFs in the market has come accompanied by asset flows, pushing the ETF industry through $1.500 trillion in total assets under management for the very first time.
As recently as three years ago, the market was flirting with the possibility of breaking through $1 trillion—in September 2010, U.S.-listed ETFs had crossed the $900 billion threshold for the first time, propelled by inflows into gold and other commodities, spread around slightly more than 1,000 ETFs.
This time, the asset-gathering game has been led by massive flows into U.S. equities ETFs year-to-date, which have snagged the lion’s share of the $110 billion-plus in ETF net inflows year-to-date. U.S. equities ETFs now represent roughly $1 of every $2 of the $1.534 trillion invested in ETFs today.
Where We Go From Here
There’s no question that most expect the ETF market to continue growing.
iShares, for instance, earlier this year projected that U.S.-listed ETF assets would more than double to $3.5 trillion-plus in the next five years . The San Francisco-based unit of BlackRock sees as key drivers of that growth things like the integration of ETFs into the core of investment portfolios. That’s an important factor considering that less than a decade ago, ETFs were considered by many to be more “satellite”-type holdings.
Rick Ferri, founder of the investment firm Portfolio Solutions and a known advocate of passive investing, projects that over the next 20 years, the exchange-traded product industry will at least triple the number of funds on the market.
“There are 1,500 ETPs currently available in addition to over 7,000 traditional open-end funds, according to Morningstar,” Ferri told IndexUniverse. “I see nothing stopping ETPs from eventually equaling traditional open-ends funds.”
That growth should come in large pockets of the open-end fund marketplace that are still difficult for ETPs to access, such as the 401(k) plans, “but there will be progress made as technology advances to the point where ETPs and open-end funds co-exist seamlessly on the platforms of large plan sponsors,” Ferri said.
While the majority of ETFs in the market today are passively managed, Ferri said he sees the next wave of expansion in the ETF industry coming from actively managed and self-indexed funds where the “fund providers will make all investment decisions,” he noted. The expected approval by regulators of nontransparent ETFs should also contribute to product innovation.
“Although the preponderance of new issue will be in active funds and self-index funds, most of the assets will continue to go into the lowest-cost market-tracking funds, with increasing interest in ‘factor’ funds that overweight risk factors in the market in an attempt to boost returns,” added Ferri.
“The trend of advisors/brokers building portfolios of ETPs rather than traditional open-end funds and individual securities will continue unabated,” he said. “The cost structure of ETPs makes the product more attractive and the tax benefit created by ETF redemption process make most equity ETFs and perhaps fixed-income ETFs a logical choice.”
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