U.S. ETF Assets Crossed $1.5 Trillion Milestone


Earlier this month, total U.S. ETF crossed the $1.5 trillion milestone and might cross the magic $2 trillion sooner than later.

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Olly Ludwig in his column posted at ‘IndexUniverse’ feels more funds would flow into an ETF wrapper from other investment vehicles.

U.S. ETF Assets Crossed $1.5 Trillion Milestone

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It would be interesting to note it took almost 18 years for ETF to reach the $1 trillion mark, ever since the first ETF SPDR S&P 500 ETF Trust (NYSEARCA:SPY) was launched in January 1993. This year too, the inflows into ETF are at a faster clip erasing last year’s record of $188 billion.

Interestingly, ETF were originally set up to bring additional trading volume into the American Stock Exchange by targeting traders, with a modest target of $1 billion considered as the benchmark for its success.

SPDR S&P 500 now has the credit for the biggest and the most liquid ETF in the world with $143 billion assets, garnering 9 percent of ETF industry’s total $1.537 trillion assets, according to data compiled by IndexUniverse.

The following picture depicts the growth of ETF’s since its launch in 1993.


ETF growth

According to several research reports, investors are showing increasing interest in passive strategy by keeping more faith on the ETF route. In its recent report, Macquarie (USA) feels such change in investors’ mindset would augur well for global investment managers such as BlackRock, Inc. (NYSE:BLK).

Some of the reasons attributable to success of ETF’s include low costs, tax efficiency and intraday tradability.

In the recent past, some of the money has flown into ETF’s from actively managed mutual funds and it is felt similar reversal of flows would be seen with bond ETF’s as well. This shift was accentuated by the fact that fee-based asset managers using low-cost vehicles such as ETF have overtaken the stock pickers.

Besides Olly Ludwig feels ETF’s would be the perfect investment vehicle for 401(k) plans, as the existing investment in retirement market has dominant holding in expensive mutual funds with several fees attached to such mutual funds.

For the record, the $13 trillion mutual funds has predominant share of $5.3 trillion invested in IRAs and 401(k)s or its related defined contribution plans.

With Charles Schwab announcement to set up a 401(k) platform designed with ETF’s in mind, one can see investments gallop into the ETF’s.

It is well known that individual security selection is less important for a proper asset allocation. Hence Olly Ludwig doesn’t find much reason for IRA investments flowing to expensive mutual funds when ETF’s offers the best tax strategy. He goes to the extent of saying any advisor not investing his client’s tax-protected retirement assets in index funds such as ETF’s might well be blamed for dereliction of duty.

Olly Ludwig however cautions investors to be aware of the capital gains tax impact when they shift from expensive mutual funds into ETF’s.

Tom Dorsey, president and founder of Dorsey Wright & Associates feels with annual trailer fees from expensive mutual funds, brokers will have lesser incentive to push for less expensive ETF’s. Dorsey considers ETF Alchemy, a mix of different ETF’s to accentuate the growth of ETF market.

Olly Ludwig feels not many investors are aware of the several benefits offered by ETF’s and hence its future growth would hinge on creating better awareness among the investing public about the vast benefits of making investments in ETF’s such as ‘no trailer fees’, better tax efficiency.

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Mani is a Senior Financial Consultant. He has worked in Senior Management role in large banking, financial and information technology organizations. He has provided solutions for major banking and securities firms across the globe in the area of retail, corporate and investment banking. He holds MBA (Finance) and Professional Management Accounting Qualifications. His hobbies are tracking global financial developments and watching sports
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