Due to their intraday liquidity and convenience as trading tools, ETFs are a fast and efficient way to express investment sentiment about a given sector, asset class or region. For this reason, ETFs can serve as price discovery tools as well as leading indicators of a shift in broader market sentiment.
In fact, in 2010 ETFs accounted for roughly 18% of U.S. equity trading volume, with trading often exceeding 2 billion shares per day.1
Yet ETFs are more than just flexible trading tools. Their tax efficiency2, transparency and other structural benefits can help make ETFs great vehicles for long-term investors, too. However, when it comes to these long-term investors, the financial media, research groups and asset management firms tend to focus solely on flows into traditional mutual funds, not ETFs. After all, even with $1.3 trillion in assets,3 ETFs are still dwarfed by mutual funds, only representing about 13% of the $9.7 trillion mutual fund market.
But I believe these traditionalists are missing a critical trend. Even from their relatively small asset base, over the last five years ETFs accounted for roughly 50% of total long-term flows4. No complex math necessary—that’s a fraction of the market taking half the total pie. Simply put, the new money coming from the sidelines has been going into ETFs at the expense of such traditional product structures as mutual funds.
For traditional asset managers, the truth may hurt. But, we believe, the flows don’t lie.