The advantages offered by the exchange-traded funds (ETFs) in combination with the innovation applied by its issuers in the products offered has attracted more and more investors and traders to become a part of the global exchange traded funds industry. The market for ETFs has grown substantially over the years with the biggest asset management companies now a part of it. We take a look at some of the trends characterizing the current ETF market.(For related reading, see:The Benefits Of ETF Investing.)

Trends In The ETF Industry

  • The global assets under management in exchange-traded products have continued to rise over the years topping $3 trillion for the first time in mid-2015. As per a report, the global exchange-traded product industry took 19 years to reach the milestone of $1 trillion in assets under management; however, it took just four years to reach $2 trillion and only a little more than two years to touch $3 trillion. The U.S. continues to be a dominant player in the global ETF market with a share of approximately $2.1 trillion.
  • The U.S. institutions are becoming increasingly embracing ETFs and now represent 36% of the U.S. market. In the last two years, there has been a dramatic spike in the use of ETFs by insurance companies to park surplus and reserve assets. The insurance companies using ETFs to invest reserve assets has climbed from 6% in 2013 to 71% in 2015. In fact, ETFs are increasingly replacing or complementing equity futures in institutional investor’s portfolios. A report reveals that, “78% of the institutions plan to replace an existing futures position with ETFs in 2016 while in 2015, 52% replaced a derivative product with an ETF.” (For related reading, see: Institutional Investors Are in Love With ETFs.)
  • The strategic (or smart) beta exchange-traded funds are witnessing a gradual gain in market share vis-à-vis the traditional counterparts. Today, strategic beta ETFs represent some of the most dynamic and potentially lucrative investments available to investors. The U.S. institutions are also investing in these innovative products. As per a report, “About 31% of the institutions—including 46% of the asset managers — are using smart-beta ETFs.” 

 

  • With increased competition, more and more asset management companies are now offering exchange-traded funds at a much lower cost. Looking back at past two decades, the expense ratio of most ETFs rose since the start of the new millennium, peaking around 2011 and started cooling down since the past couple of years according to a report by CLS Investments, “In 2011, the average expense ratio of a newly launched ETF was 0.80%” while the average fund tracked by Morningstar charged 1.22% in 2005 as per a WSJ report. In recent years, there is a new competition of offering ETF products at lower costs. The big brands such as Schwab and Vanguard have been trimming prices, the rest following their moves. As per a WSJ report, “more than 100 mutual funds and exchange-traded funds now cost $10 or less per $10,000 invested, up from 40 in 2010.”
  • Statistics and reports reveal that exchange traded funds are a favorite investment product with millennials especially in the U.S. According to Schwab’s 2015 ETF investor study, “Millennial investors have a higher percentage of their investments in ETFs and are more likely to see ETFs as a core investment.” Around 66% of millennials (age: 25-35) have an exposure of 25%-100% of their portfolios towards ETFs while the percentage drops to 30% for GenX (age: 36-50), 16% for boomers (age: 51-68) and 17% for matures (age: 69-75). The millennials expect a mean average of 41.7% investments in ETFs over the next five years.

The Bottom Line

While exchange-traded products are gradually becoming a part of investors' portfolios, their penetration outside of the West remains limited. But as investors become more familiar with these products and understand the benefits they offer, the market depth of  ETFs should increase over time. The industry has huge potential with its mix of creative products but has a long way to go before it gets closer to the global mutual fund industry which is beyond $16 trillion. (For related reading, see: 5 Common Misconceptions About ETFs.)

Want to learn how to invest?

Get a free 10 week email series that will teach you how to start investing.

Delivered twice a week, straight to your inbox.