Exchange-traded funds (ETFs) had an incredible year in 2017. A recent report by ETF.com indicates that ETFs gathered new assets totaling more than $450 billion for that year, in some part thanks to the strength of the U.S. equity space. In 2018, although ETFs are still among the hottest and most popular investment vehicles for investors across the country, the figures are likely to be somewhat less impressive. The report estimates that the inflows for ETFs as a group in 2018 are likely to be closer to $200 billion or so, in keeping with levels from 2014 through 2016.
All of this means that, while ETFs have had a good year by that metric, a year-to-year comparison does not look as favorable as it might have otherwise. Couple that with the fact that the S&P 500 is poised to vastly underperform its gains of roughly 20% for 2017, along with increased levels of market volatility, and 2018 is likely to be a mixed bag for ETFs.
Nonetheless, there are some funds and issuers that have managed to rise to the top of the crowded space for 2018. In particular, bond ETFs may come out of 2018 as particularly strong performers.
Bond Funds Saw Lots of Interest
Based on new money in 2018, bond funds have been among the most popular in the ETF space. Through November 2018, the iShares 1-3 Year Treasury Bond ETF (SHY) brought in about $3.5 billion in new assets. The Vanguard Short-Term Treasury Index ETF (VGSH) has garnered roughly $1.7 billion in new assets. Both of these figures dramatically outpace inflows for these funds for the entirety of 2017. SHY drew $456 million and VGSH $948 million for that year.
It makes sense that investors would turn to bond ETFs at this time. Stock volatility has prompted hesitation among many investors, and the ETF space is increasingly seen as a safer place to store assets. Furthermore, the fact that SHY and VGSH represent the two largest ETF issuers – iShares and Vanguard, respectively – ensures that they will occupy a position of prominence in the large ETF field.
Other Leaders Remain Difficult to Assess
As we approach the last few weeks of 2018, it remains challenging to pinpoint other top performing ETFs and issuers. While iShares and Vanguard account for 73% of net inflows through the end of October of this year, about 64% above their market share, the positions below the top two are in flux. State Street enjoys 17% market share, and Invesco is at 5%, but these two issuers have each lost ground this year.
State Street saw about $8 billion in net outflows as of the time the ETF.com report was issued, perhaps as a result of poor performance in the SPDR Gold Trust (GLD) and the SPDR S&P 500 ETF Trust (SPY). Invesco saw limited inflows because of redemptions in some of its products. Charles Schwab, on the other hand, which stands as the fifth largest issuer by AUM, saw net inflows of $23.7 billion over the same period. First Trust, in sixth place, brought in about $10.7 billion at the same time.
For each of these two rising stars, bond ETFs likely played a major role in their success. Two Charles Schwab bond ETFs – the Schwab U.S. TIPS ETF (SCHP) and the Schwab Intermediate-Term U.S. Treasury ETF (SCHR) – brought in a total of $5 billion over the period in question. First Trust's Enhanced Short Maturity ETF (FTSM) saw inflows of $1.6 billion in the same period, twice those of 2017.
Regardless of which issuers end up on top for net inflows for 2018, it appears that bond ETFs will be an important factor.