The very first exchange-traded fund (ETF), the SPDR S&P 500 ETF (NYSEARCA: SPY), was launched by State Street Global Advisors in 1993, with $6.3 million in assets. Since then, the growth of the ETF industry has been meteoric. At year-end 2014, the U.S. ETF market contained 1,411 funds, with nearly $2.0 trillion in assets under management (AUM). ETFs offer a number of advantages over mutual funds, including more favorable tax treatment and better liquidity. It is not surprising that retail and institutional investors continue to migrate out of mutual funds and into ETFs. With this macro trend as a backdrop, the following are four specific trends occurring in the ETF market in 2016.
Domestic Equity Funds Gain Assets
Domestic ETFs that cover a broad base of sectors and industries, such as stocks grouped by market capitalization, saw their assets increase in early 2016. At the end of 2014, broad-based domestic equity funds, large-cap domestic equity ETFs, mid-cap ETFs and small-cap ETFs accounted for about $751 billion, $556 billion, $101 billion and $94 billion, respectively, of the $2 trillion in ETF assets. In January 2016, broad-based domestic equity funds had increased their total to $909 billion in assets, representing 45% of all ETF assets. It is likely that, as more investors move out of mutual funds and into ETFs, the share of ETF assets represented by broad-based funds will continue to increase.
Sector Funds Gain Assets
Domestic ETFs that cover specific industry sectors, such as energy or telecommunications, saw their assets increase more modestly, as of March 2016. At the end of 2014, sector ETFs accounted for about $268 billion, or 13.4%, of the $2 trillion in ETF assets. By January 2016, these funds represented about $296 billion, or 14.7%, of all ETF assets. The growing popularity of sector allocation in retirement accounts should fuel the continuation of this trend for many years.
ETF Redemption Trends Continue
So far in 2016, gross redemptions have exceeded gross issuance for all ETFs. This represents the continuation of a trend that started in 2015. In January 2016, there was $143.0 billion in new ETFs issued, while $143.3 billion was redeemed. In 2015, there was $129.4 billion in new issuance and $133.4 in ETFs redeemed. The anemic performance of global markets in 2015 and the start of 2016 provides a logical explanation for this emerging trend.
Total Number of ETFs Grows
There were 1,603 ETFs in January 2016, for an increase of 198 over January 2015. The biggest increase in the number of funds occurred in the category of international or global funds, in which the number of funds increased from 499 to 601 over the past year. There was also an increase of 82 domestic equity funds, including 51 broad-based funds and 31 sector or industry funds. There were 13 new bond funds created during this period.
As of December 2014, there were 52 financial institutions that were offering ETFs to the public. As demand for ETFs grows, so too will the number of product offerings and the number of institutions that offer them. One of the challenges that sponsors of new funds face is how to differentiate their products from competitors. If the total number of ETFs begins to level off or decline, it likely signals that new product offerings are beginning to replace existing ones and the ETF market has matured.