Why ETF Use Is Still Growing Among Investors, Advisors

The ETF industry in the U.S. has drawn year-to-date net inflows of more than $343 billion, the second-highest on record, including $35.54 billion recorded last month, independent research and consulting firm ETFGI recently reported.

ETFs continue to expand in the U.S. among retail investors, financial advisors and institutional investors, with each one finding different use cases, Deborah Fuhr, ETFGI managing partner, founder and owner, told ThinkAdvisor in an interview early this month.

In July, assets invested in the ETF industry in the U.S., including exchange-traded funds and other exchange-traded products, increased by 6.9% month-to-month to $6.61 trillion, according to ETFGI, which also reported that the U.S. industry had 2,981 products from 251 providers on three exchanges.

Platforms that allow investors to buy and sell stocks and ETFs commission-free are helping to drive retail ETF use, Fuhr said. “That was a big change.”

Many retail investors find ETFs a useful tool to address their views on trends and themes and other market areas in which they want exposure, she said.

“You’ve also seen financial advisors increasing their use of ETFs,” Fuhr noted, adding that many use model portfolios that come from ETF issuers or other sources. Model portfolios using ETFs also are driving flows, she said.

Active ETFs have become more popular as investors look for the COVID-19 pandemic to be over and to take on more risk, according to Fuhr, who noted that several major firms have now entered the industry with active ETFs. (Capital Group introduced six active ETFs this year, its first ETF suite.)

Some firms, like Dimensional Fund Advisors and J.P. Morgan Asset Management, have been converting mutual funds into ETFs, which generally are more tax efficient, she noted.

The Financial Times, citing Morningstar Direct data, reported last year that 60% of the ETFs launched in the U.S. in 2021 were actively managed.

“I think there’s a lot of positive trends and tailwinds pushing the ETF industry forward, which I think is a good thing for investors,” as more retail advisees, institutions and issuers get involved, said Fuhr.

Fuhr cited ETFs’ democratic nature, with the same investments, classes, prices and fees available to everyone. “This is a unique product where everyone has the same access,” she said.

Investors should do their homework when selecting ETFs and not assume that products are the same because they sound similar, said Fuhr. It’s very important to understand the benchmark and the investing methodology, as well as the underlying securities’ liquidity, she said.

July ETF Flows

The data reflected strong fixed income ETF inflows in July, although equity ETF net inflows surpassed fixed income year to date.

Among the July statistics:

• Equity ETFs and ETPs drew net inflows of $6.9 billion, bringing the YTD net inflows to $166.32 billion.
• Fixed income ETFs and ETPs experienced $26.87 billion in net inflows, bringing YTD net inflows to $92.9 billion.
• Active ETFs and ETPs gathered net inflows of $4.39 billion, bringing YTD net inflows to $57.36 billion. 

The top 20 ETFs by net new assets accounted for substantial inflows — $40.23 billion altogether in July — with the iShares US Treasury Bond ETF (GOVT US) logging the largest individual net inflow at $4.77 billion, according to ETFGI.

The next four top products in July were the Vanguard S&P 500 ETF, iShares 20+ Year Treasury Bond ETF, iShares iBoxx $ Investment Grade Corporate Bond ETF and iShares Core S&P 500 ETF, the firm said.

The 2022 year-to-date net inflows compare with $523.89 billion at the same point in 2021, the firm said in a release last week.