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ETFs' Growth Story: It's Complicated

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The exchange-traded fund market may be capturing the attention of investors because of its fast-paced growth in assets and number of funds, but that headline fails to reveal some key developments in the market over the past five years.

According to a recent CFRA report by Todd Rosenbluth, director of ETF and mutual fund research, and Aniket Ullal, head of fund data and analytics, just 100 ETFs accounted for 83% of cumulative asset growth from year-end 2014 through August 2019. Twenty ETFs accounted for 44% of asset growth. 

BlackRock and Vanguard dominated, sponsoring 69 of the 100 fastest growing ETFs, and 16 of the 20 fastest growing funds, illustrating what CFRA calls a “winner takes most” concentration effect and the allure of low-cost core index funds.

As of the end of August, U.S. ETF assets totaled $3.94 trillion, having increased more than $254 billion, or almost 7% over the previous 12 months, according to the Investment Company Institute. Assets of U.S. mutual funds rose $445 billion, or 2.2% to $19.93 trillion, five times the total assets of ETFs.

The total number of mutual funds as of the end of August was 8,009, almost four times the number of ETFs, at 2,053, according to ICI, but their net asset flows, representing investor demand, are much smaller.

Year to date through Aug. 31, net asset flows into mutual funds were $59.6 billion, less than one-third the $202.1 billion of flows into ETFs, according to Morningstar data.

Asset Growth and Shrinkage Among ETFs

The CFRA report focused on 1,662 ETFs listed in the U.S. as of year-end 2014 following their  progress — and demise — through August 2019. Over that time, cumulative assets grew by 90%.  

Four-hundred twenty-three ETFs, or 25%, saw assets grow more than 20%; 112 funds, or 7%, experienced asset declines; and 399 funds, or 23%, closed. 

Vanguard was the only fund company that had no ETF closures, and 98% of its ETFs grew assets, a higher percentage than any other fund company, but the number of its funds in the study, at 67, was far less than the number at BlackRock, Invesco and State Street. They all had well over 100 ETFs at the end of 2014 and in the case of BlackRock almost 300 funds.

One-third of the ETFs that closed between year-end 2014 and the end of August 2019 were exchange-traded notes (ETNs), which are index-linked unsecured debt securities, and many of the closed funds never gained substantial assets. Their median assets under management at the end of 2014 were $10 million, and by the end of August 2019, 90% of them never accumulated more than $100 million in assets.

On the growth side, CFRA also found significant investor interest in thematic or smart beta strategic ETFs, in addition to low-cost core index funds. But the interest in these ETFs is volatile, reflecting changing macro factors, producing boom and bust cycles in asset flows.

WisdomTree’s Japan Hedged Equity Fund (DXJ), for example, reached $15 billion in assets in late 2015 due to the strength in the U.S. dollar against the Japanese yen, but when the dollar subsequently weakened against the yen, interest waned, and by August 2019 the ETF had lost 80% of its assets.

ETFMG’s Prime Cyber Security ETF (HACK), in contrast, had $107 million in AUM at the end of 2014 and more $1.4 billion at the end of August 2019, indicating the demand for cybersecurity stocks.

Beware Changing ETF Names, Symbols and Objectives

ETFs can also be substantially affected by changing their investment objectives, which often involves changing the underlying index as well as the fund’s name and ticker, essentially resulting in a very different fund.

The first Trust India Nifty 50 Equal Weight ETF (NFTY), for example, was called the First Trust Taiwan AlphaDex ETF (FTW) before April 2018, focusing its investment on a very different Asian country, according to the CFRA report.

Of the 1,662 ETFs in the CFRA study, 30 changed their investment objectives, which is a small number, but for the investors in those funds very possibly an ETF they never wanted to own.

“Investors need to examine an ETF’s constituent holdings rather than relying solely on relative past performance or index-tracking success as other providers do,” according to the CFRA report.


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