The exchange traded fund industry is still in its infancy relative to the mutual fund business. Key trends that have supported the growth of the ETF industry have continued to play out through the global growth slowdown and are expected to remain strong into the new year.
“Even if the outlook is less rosy than it was, it’s still positive — and perhaps better than things look on the surface. Overall, analysts forecast that S&P 500 earnings will grow 7% in 2013, on top of expected 4% gains in 2012. What’s more, says BMO strategist Belski, the quality of earnings is improving, with cash flow growing faster than reported profits,” Anne Kates Smith wrote for Kiplinger. [ETF Industry Trends for 2013: Bonds, Dividend ETFs, Emerging Market Debt]
ETFs are essential trading tools for both institutional and individual investors. They track areas or sectors of the market passively, rather than trying to beat it, reports Mark Jewell for Associated Press. For many reasons, investors may pour more assets into ETFs than mutual funds. [Defensive ETFs to Shield Against the Fiscal Cliff]
For one, there has been a widespread acceptance of ETFs on Main Street however, the bulk of assets has come from institutions. The individual investor accounts for about 60% of $1.3 trillion ETF industry assets, whereas 40% comes from large institutions. The ongoing realization of ETFs by individual investors will continue to keep growth steady. Solidifying this trend is the fact that ETF industry growth has surpassed the rate seen by mutual funds lately. So far this year there has been more than $150 billion in net deposits through November in ETFs. They are on track to match a 2008 record for the amount of new cash taken in, according to Morningstar. However, for every dollar in an ETF, investors have stashed $7 in mutual funds. So there’s still plenty of ground to make up. ETF assets are projected to nearly double to almost $3.5 trillion by 2016, according to a study by Cerulli Associates, reports Jewell.
Cost-cutting within the ETF industry is another favorable aspect within the business that will continue into 2013. Some of the industry’s biggest providers have cut expense ratios this year, and leaders such as Charles Schwab are considering a fee-free platform. More cost-cutting is expected while providers remain innovative and reduce overhead operating costs in response.
In 2013, the bond ETF will continue to be a popular tool. This year, they’ve attracted $52 billion in net deposits through November, reaching a total $245 billion in assets, according to Strategic Insight. There was $3.5 billion invested in the PIMCO Total Return ETF (BOND) in 2012, a fact that exemplifies the trend toward bond ETFs, and the first successful actively managed ETF. The growth of the actively managed ETF industry will put down more roots since BOND has been able to pioneer the strategy into a product that has generated returns and attracted assets. [How PIMCO Manages Its Active ETF]
The large number of ETF closures in 2012 is a trend that will also be evident going into the new year. Most of the ETFs that have folded have had less than $10 million in AUM. The fact remains that only the strongest and most successful ETFs will survive. This is a natural evolutionary process and is essential to keep the best products coming forward while weeding out the unnecessary.
So far, there are 1,200 ETFs trading on the market. There are about 48 ETFs that make up around two-thirds of all industry assets. There is growing potential but the products that survive will be of the highest quality at the best possible price.
Tisha Guerrero contributed to this article.
Full disclosure: Tom Lydon’s clients own BOND.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.