Closing in on $2 trillion in assets, the U.S.-listed exchange traded fund industry is too big to ignore. Still, contrary to what some may believe, the ETFs are not responsible for broad market moves as growth in assets have come at the expense of mutual funds.
There are currently 1,658 U.S.-listed exchange traded products, which include both exchange traded notes and ETFs, on the market, with $1.987 trillion in assets under management, according to XTF data. However, ETFs do not wag the market. [ETFGI: Global ETFs, ETPs add $199B in Q3]
Fund industry asset flows reveal that ETFs are not responsible for pushing the U.S. stocks to new highs but act as a substitute good to traditional mutual funds, according to Nicholas Colas for ConvergEx.
“In part they are ‘Substitute goods’ to mutual funds, offering similar investment exposures with lower costs,” Colas said in the article. “In part they are novel investment products, where the same ETF can be a hedge at a billion dollar hedge fund and a core position in a civil servant’s IRA. They have soaked up a large part – but not all – of the decline in U.S. equity mutual fund assets over the last half decade. And they have added modestly to the demand for fixed income investments, but mutual funds are the real driving force there.”
Over the last five years, U.S. stock mutual funds have seen $411.1 billion in outflows. Meanwhile, U.S. equity ETFs pulled in $301.5 billion. The flows indicate that as mutual fund investors pull away from traditional funds, most are putting the money right back into low-cost ETFs.
On the fixed-income side, ETF flows still fall short of mutual funds. Over the past five years, bond ETFs added $132.5 billion, whereas mutual funds attracted $814.3 billion.
The ETF industry, though, is gaining momentum. It took about 18 years for ETFs to reach the $1 trillion milestone, and by the looks of it, ETFs will only need four years to reach the $2 trillion marker. ETFs also pulled ahead this year, bringing in about $92 billion in new assets this year, whereas mutual funds saw $44.7 billion in outflows as of November 19.
ETFs will continue to act as a new disruptive technology on Wall Street, democratizing and simplifying access to capital markets for the average retail investor.
“They are the Uber of capital markets, pairing low(er) cost and convenience to offer a service previously associated with wealthier consumers,” Colas added.
For more information on the ETF industry, visit our current affairs category.
Max Chen contributed to this article.